Good day, ladies and gentlemen, and welcome to the Second Quarter 2013 Apogee Enterprises Earnings Call. My name is Clarissa, and I will be your operator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I will now turn the call over to your host, Ms. Mary Ann Jackson. Please proceed.

Good morning. Thank you, Clarissa. Welcome to the Apogee Enterprises fiscal 2013 second quarter conference call on Thursday, September 20, 2012. With us on the line today are Joe Puishys, CEO; and Jim Porter, CFO. Their remarks will focus on our fiscal 2013 second quarter and our outlook for fiscal 2013. 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 risk 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 this fiscal year ended March 3, 2012, 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. Before I turn the call over to Joe, I'd like to note that Apogee will be hosting an Investor and Analyst Day in New York on Thursday, November 8. Joe and several of his business unit heads will be making presentations, strategies and other key topics. If you like to receive a formal invitation when they go out in a few weeks, please let me know at mjackson@apog.com. Joe?

Thank you, Mary Ann. Good morning, everyone and welcome to our earnings call. I'm very pleased with our second quarter earnings, which were better-than-expected. As you've read, we are at $0.18 per share, $0.17 per share from continuing operations in the quarter, which are, in fact, the same earnings as we had for all of fiscal 2012. In addition, we achieved more than 6% growth on the top line, even though our end markets have yet to improve. This is in line with our expectations and was the result of some of our key growth initiatives. In addition, both our architectural and Large-Scale Optical segments grew their top and bottom line, as well as their margins, and all of our operations performed well. Our architectural segment swung the profitability in the quarter. Compared to last year, we have higher architectural glass pricing, the benefit of volume growth from our storefront and installation businesses and better-than-expected operational performance across the segment. Also noteworthy is our significant architectural backlog growth at better margins. Our backlog is up more than 30% from the prior-year period and nearly 12% from the end of the first quarter. Margins on new projects that are being added to the backlog by our install business are more than 200 basis points better than margins currently being completed. At $300 million, the architectural backlog is at its highest level we've seen in over 12 quarters. With our strong second quarter earnings, the quality of our architectural backlog and the visibility this backlog provides for the remainder of this year, we have increased our earnings outlook for fiscal 2013 to $0.56 to $0.64 per share. You know our previous guidance was $0.48 to $0.58 a share. In the second quarter, I'm pleased that we generated positive free cash flow of…

Thanks, Joe. Our second quarter performance came in at the high-end of our internal expectations in continued weak market. We earned $0.17 per share from continuing operations compared to a loss of $0.06 per share last year, exceeding our prior year performance as we indicated we expect to do each quarter this year. The prior-year period included $0.05 per share of CEO transition costs. We also had $0.01 per share noncash earnings in discontinued operations in the quarter for net earnings of $0.18 per share. Apogee's gross margin improved almost 500 basis points to 20.5%, up from 15.7% in the second quarter of last year. This is up about 30 basis points from last quarter, with improved capacity utilization, somewhat offset by higher healthcare and insurance cost experienced this quarter. Our architectural segment had operating income of $3 million compared to an operating loss of $5.1 million in the prior-year period. Segment revenues grew 5%, largely as a result of share gains in the installation and storefront businesses, which are also expanding into new domestic geographies. Second quarter architectural segment capacity utilization was approximately 63%, up from 52% in the first quarter and up slightly from 61% in the prior-year period. As our capacity utilization increases with architectural segment growth, we're better leveraging our fixed assets, and have the opportunity to expand our margin. Our architectural backlog increased more than $70 million year-on-year and more than $30 million from the first quarter to reach $299 million, our highest backlog level in 3 years. I'll remind you that our backlog can be lumpy based on the timing of project awards quarter-to-quarter. That said, we do feel good about the growth trend in our backlog. Our backlog mix at the end of the second quarter is consistent with the first quarter. The…

Thank you, Jim. Before I turn it over to Carissa to open up for questions, I'd like to reiterate something Mary Ann referenced, and that is, that I'm particularly pleased to be hosting an Apogee Investor Day, our first one. On November 8 in New York City where Jim and I will present more details on our businesses, including our growth agenda and you'll see presentations from the presidents of 3 of my business units: Our largest Architectural business, our installation business, and our Large-Scale Optical business. And I'll also have my new senior operations leader presenting as well. So I look forward to seeing some of you in New York City on November 8. So with that, Carissa, if you would, please open up the call for questions. I would appreciate it.

[Operator Instructions] And your first question comes from the line of Robert Kelly of Sidoti.

Just a question on the second half of fiscal '13. You had referenced prior to the Q2 report the EBIT margins on projects you were signing up anywhere from 200 to 300 basis points better than projects you had -- already in hand in backlog. Is that still the case? Do we build plus 200 to 300 off of this 2Q architectural results or -- and how do we think about the margins that you have in backlog going forward?

Thanks, Bob. This is Joe. We had -- I'll answer your question in 2 ways. Number one, the projects we're putting in to the backlog are at more than 200 basis points better than the projects coming out of the backlog. In fact, our margin in backlog increased more than 100 basis points from the quarter itself from our Installation business, so -- and of course, it's not a complete turnover of the backlog, far from it. So both what's in backlog and what's going into the backlog are at improved margins. And I'll ask Jim if he'd like to add comments to that.

Yes, just off that, obviously, we have to continue to flow out the lower margin projects and the new projects that we're booking at over 200 margin points. I mean that's where that's going flow in the second half of this year and into next year. So as you know, we'll still have some kind of blending of that activity in the second half of the year.

Okay, I can follow that. And as far as the quarter has ended, 2 questions, one on architectural, one on LSL. The architectural process, it seems to be something that happened intraquarter that drove the profit there or was that a fact -- a matter of the blending that you just talked about?

Well, Bob, we had certainly good mix within the quarter as we continue to pursue higher value-added content. And our new product introductions are geared towards higher margin additions to our line. And so we had good mix and we also had better operational performance than I had expected. So not that we're not pushing for significant improvements in our operations, but we got even more than I was counting on when we built our Q2 forecast.

And Bob, kind if within there, Joe mentioned mix. I mean as you know in the architectural side of the business, the timing of each project as they flow kind of moves around quarter-to-quarter, and so we did have a little bit kind of richer mix of complex projects flowing through in the quarter, maybe than we fully expected. And then also I think the Large-Scale Optical segment, as you know, there's a lot of leverage on that business and quarter-to-quarter based on markets and retailers, you kind of see revenues move around quarter-to-quarter. And our top line was a little bit stronger than we expected in LSL, and that falls through the bottom line.

Yes, just on LSL, the incrementals for the past 2 quarter, the incremental margins have been north of 50% for the past 2 quarters. What is driving that? I mean the comps aren't that easy. Is it a mix? Is it the international push? Is it the branding and marketing initiatives? And is that type of incremental sustainable?

Actually our second quarter comps were not that difficult -- second quarter last year wasn't as strong. We continue to move the mix of product towards our higher content, Picture Framing glass and the team has been very successful in marketing programs to drive that.

Any help on the sustainable and incremental margin for that business?

Sure. The end markets for this segment are certainly stagnant right now. It's primarily driven by consumer confidence and consumer spending. So I think there's some tailwinds on consumer spending. Headwinds on consumer confidence, so let's just say we're not getting much help from the market similar to architectural at this moment, but we have other initiatives to offset that. New products that we've introduced. We introduced new products for the fine art market this year and in the second quarter in particular. And we've begun our efforts to drive international growth in that business to help move us faster than the current -- than the segment itself in the U.S.

All right. One follow on if I may on architectural. The blending of the newer higher-margin, higher project values and running off of the lower margin installation work, when do we hit the end of the runway for the low-margin installation mark?

It should mostly be run out by the end of the fiscal year.

And your next question comes from the line of Jon Braatz of Kansas City Capital.

Joe, let me ask you and maybe you touched on this, but since you've been on board, I know you've instituted some new programs in LSL and maybe some cost savings and efficiency programs. Have we seen much impact of maybe some of the things that you addressed early on since your arrival? Are we seeing some benefits of that at the moment?

I believe we are -- I'll answer it 2 ways. First growth and secondly, productivity. On the growth I would say we have an amped-up focus on new products, new markets and new geographies that are beginning to pay dividends. It's safe to say we have NPI rigor and vigor in all 6 of our businesses right now. And one of our highest levels of products we've launched this year and -- which I can talk to and we probably we'll talk at length in the November meeting. And also for the New Year coming. So I like, and feel we're making impact on new markets, new products and new geographies. Operationally, I would say, while we're performing better clearly, our factory has done a fantastic job with improvements in quality and significant improvements in delivery. We still have yet to see benefits from my agenda to drive lean across this company. So I think from a muscle perspective, we are making some headway, but from a reliable, repeatable, disciplined, rigorous process of lean, we have a journey that will take us a couple of years. So that is yet to set in, but we are beginning the journey.

Okay. I think you had mentioned your capacity utilization like 63%. I think that was the number. Is there any -- what can you tell us about -- should that go to 70%, 75%, what type of impact or leverage that has on your operating margins?

Well, clearly, that has a lot of leverage on them. And even the 63% utilization is a blend across our businesses, but we still have capacity to grow and -- both in fixed asset and fixed costs, to get incremental contributions.

Okay, you can't really quantify that, can you Jim? Have you moved 10% higher, what that means?

Jon, I think the way that we've talked about it is, that as Joe set a goal of getting to 40% incremental contribution or conversion on incremental volume, and that's largely driven by being able to leverage that.

One last question, Joe, you talked about the margins on the incoming orders, better than what they have been. Are they getting progressively better such that the new business that you win today is a little bit better than the margins that you won a month ago, any thoughts on that?

I think over the course of the year I've been here, I would say your statement is generally true. As Jim said, it's a project-by-project basis, it can be lumpy. It's been trending up, and I think the projects this quarter are slightly better than the projects last quarter. So there's no question it's better, and I think the trend is positive. We've had some -- a lot of local competitors around the U.S. chased projects into the gutter, our installation business did not. Volume certainly suffered, but overall, the margins went down, some of those competitors have gone out of business. And we're seeing -- I think I mentioned this in the last earnings call, we've seen some of the contractors, let's call it flight to safety, and understand the value of dealing with an installation company as part of a publicly held company they have to disclosed its earnings and balance sheet performance and we -- it certainly has been tailwinds for our margin. And that has happened this year and, therefore, contributes to the answer I gave you of seeing some trending upward. And we've also seen certainly a positive mix as our installation people have done a better job at defining the kinds of projects they want to go after.

Your next question comes from the line of Brent Thielman of D.A. Davidson.

Joe, I was hoping you could delve a little bit more into the backlog growth in the quarter, particularly sort of what product areas between glass, storefront or installation that growth came from? And then any unusual -- unusually large jobs included in that number?

I'll let Jim kind of explain our backlog for you guys, but the growth came primarily from our installation business. Really, the way we book backlog is primarily from the aluminum side and the installation business. The glass business books pretty much on a -- when we get it released to supply for, let's say, the first 4 floors on the building, it maybe a 100-story building. We don't book it into backlog until we get the release, whereas in the project business it goes in the backlog when the entire project is won. So it's primarily -- to answer your questions, the growth primarily came from our Installation business.

And Brent, this is Jim. So first of all, I'll remind you that installation is the biggest part of our backlog and also just kind of lumpy nature of our backlog that we have. But I think we did have one project in the quarter added that was a little over $20 million, but that's not unusual for us. I mean we want every quarter to have a $20 million project, but that has not been unusual over the past 2 quarters.

Sure, that's helpful. And then you mentioned, I guess you're passing some tougher comps here on the pricing front for glass. Is the market strong enough yet to push that pricing higher or do you think we sort of level off here from a pricing standpoint until sort of capacity fills a little bit more around the industry?

I believe the latter, Brent. I think we are pretty much where we'll be. We are at prerecession pricing. And we haven't seen any inflationary issues on the raw materials we use for our products, so I would suggest that it will be for the rest of this fiscal year, I think it will stay about where it is.

Okay. And then question on the Brazilian operation, just the performance there. Are you continuing to see sort of a rapid growth in orders in that market?

Yes, the Brazilian operation is achieving planned performance and we had -- we did not have wimpy plans for that business. So it is performing well on both growth and conversion. And although compared to our backlog, it's -- let's say, a relatively small piece of the backlog. That business is also at its highest level of backlog that it ever had. So the future is positive for the Brazilian operation and the management team is doing an excellent job with that business.

Okay, and then just lastly, and I think on asking previous questions maybe in a different way, but when I look at the Architectural business, I mean historically, margins have been 5% or higher as construction activity really gets going. Is the current bidding climate and I guess backlog starting to support margins at least back towards those more normal levels for the entire Architectural business? Or does it take a little bit more time to see that?

I'd say it's a combination of the current backlog and the work that we're bidding that's positioned. So again, we need, as Joe indicated, we're continuously seeing the, kind of, overall average margins come up. So we're not quite there yet, but I think we're -- the bidding level, including -- and the backlog today are getting us back to that level.

[Operator Instructions] And your next question comes from the line of Scott Blumenthal of Emerald Advisers.

Joe, you did allude a couple of questioners ago to the state of the competitive environment, and I was wondering maybe you could discuss the state of some of your larger competitors? And whether the, I guess, the competitive landscape has thinned out a little bit for you on I guess of the larger side not just the mom and pops?

Yes. There has not been any significant movement or shakeout in the competitive landscape for most of our architectural businesses other than the installation side. There have been several small or let's say relatively small glazers close their doors. We, of course, highlighted in the first quarter our entry into the Texas market. That was facilitated by the exit of a competitor. And we took on a lot of nice work because of that. So not significant outside of the glazing side of the business -- the glass fabrication, we've really seen no change.

Okay. You kind of anticipated my next question with regard to Texas, so I was wondering if you would be willing to share with us how much moving into that market might have contributed to your improved performance in backlog during the quarter?

It didn't really contribute to our performance in the quarter. And we have good opportunities there. I don't think it had a significant increase in our backlog in Texas.

No. So I mean in terms of revenue, Scott, I'd say business coming out of Texas from that investment was probably kind of roughly in the $5 million to $7 million range. I think it was probably kind of bottom line neutral just because we had to invest to get into that business. And we probably have a similar level of kind of backlog related to that market.

Our goal was to be accretive for the full year with that investment, so we're certainly not there yet, but it's meeting our expectations, at least.

But importantly, Texas really remains one of the strongest commercial construction markets that we see across the country. And the pipeline of potential projects in that market, combined with the strong relationships and performance that our team has down there continues to have us feel really optimistic about that.

Okay, terrific. And I guess one more, if I may. You did talk a little bit about international opportunities as well. Joe, were you just talking in terms of Brazil or do you see things in other places as well?

We see things in other places as well. In our Picture Framing business, we have entered the European market and while it will be small to the total Apogee results, it is a nice opportunity for that business to grow in relatively flat markets and we're already beginning to see some movement in Europe on the Picture Framing, glass and acrylic business. And in our large architectural glass fabrication business, we continue to look at opportunities other than Brazil.

Your next question comes from the line of Tom Sepenzis of Northland Securities.

Most of my questions have been answered, but I was just wondering if you could talk a little bit about Large-Scale Optical and whether you think that's hovered kind of in the $70 million, $75 million range for the last few years? And just looking out forward where you think that can grow -- do you think that business can grow above the $70 million, $75 million range and continue to grow going forward? Or is there a limit there?

I absolutely expect it to grow and I have large hopes for that business. And then the team is on a renewed vigor to look at new products, new segments, new geographies and, frankly, new tangential opportunities in that space. So I would be disappointed if we don't see nice growth over the next 3 years in that business, but it will have to come from some hard work. The team is doing a lot of seed planting right now as is our Architectural segment, so we spend an inordinate amount of our time on seed planting for supporting the growth of this business over the next 3 to 5 years. So I certainly expect it to, but it'll have to come from some of things I mentioned, new products, new segments and new geographies, which they are prepared to do, so I have high hopes for that.

And how do you think about the margins on that business? It seems to be -- it's up year-over-year for the last couple of quarters, but there's, obviously, some lumpiness. Do we expect November should see a little bit greater sales given the seasonality and therefore, better margins and then back down going into the February quarter? Is that a fair way of looking at it?

Tom, this is Jim. That's appropriate. Seasonally, Q3 is our strongest and so we expect it to be our strongest quarter of the year. And then you're right, Q4, we expect it to step down.

Great. And just a final question. Do you have -- what is the kind of a general breakdown between the glass sales and installation and the architecture business?

I think the glass is our biggest business and so it represents roughly 40% of the total segment revenues, and installation is probably above 30%.

And your next question comes from the line of Robert Kelly of Sidoti.

Just in your opening comments, you talked about, I believe you characterized the McGraw-Hill pushing out the recovery expectations for the first half of your fiscal '14. Is that a change to the time frame that you're expecting? Or is that still on track with how you think about the end market?

It's in line with what Jim and I had anticipated when we highlighted our annual operating plan in our first call this year, and I've seen folks felt we are being too conservative because McGraw-Hill was calling for growth. And we built our plan of mid-single-digit growth on the assumption that it would be flat. And, unfortunately, we've been proven right, so I would simply say that the McGraw-Hill forecast has pretty much come down to where we feared it would be. And it's indicative to the opposite end of what happened when the market kind of cratered 3-plus years ago, it was quarter after quarter after quarter of projecting the commercial segment to drop and it kept holding its own and growing. But then when it finally dropped, it went fast. And -- let's see if that happens on the upside. So the answer is, it's in line with what our expectations were, and we built our plan around assuming it would not recover this year.

And Bob, to remind you, I mean our view is that we believe that we're positioned to grow faster than the market that McGraw-Hill projections, so that's where -- and so McGraw-Hill's outlook, it probably came down slightly for the current fiscal year, for next fiscal year in terms of moving up. They were previously projecting to start to see a little bit of growth in Q1. Now they're not seeing growth in Q2, but -- and we just look at that as one reference point and it's really directional. And at the end of the day, we expect it to do a few points better in growth than the market and if we see growth next year, then you should see some stronger growth out of the market.

Great. And my follow-up to that is, end market is flat to down, really not showing signs of recovery until maybe next calendar year. It might have been asked already or maybe you could just get again go over, the backlog growth comes from what exactly? Is it -- the project value is driving much of the increase? I mean I don't imagine your project for project is up 30%.

No, our average project size is up probably less than $1 million. But it's really the combination of really kind of focused activities going after the best projects, so as we've talked about kind of new geographies -- not only is that the growth in Texas, but pursuing projects. So for example, we added a project in backlog in New Orleans, market that we don't have a shot, but a significant project. So it's really continuing to look for the projects that have complexity where we can really add value. And then I think -- and maybe the comment about complexity is, across our businesses, we're starting to see, in some cases, some bigger projects and projects that are more complex, which really fit us better and we're able to be selective.

I would add that I believe in all of our businesses, this comment will apply, but I'll highlight installation business since your question is around that. There is an amped-up level of rigor and discipline around the kinds of jobs we will go after and the execution on those jobs is improving because of that rigor and the installation team, there's a lot of new leaders in that business that have added a lot of rigor. And not chase projects into the gutter to go after the projects that are smart for us and that we can perform well on. And that rigor is starting to pay dividends and we'll continue to do so going forward.

And there are no further questions. At this time I like to turn the call over to Joe Puishys for closing remarks.

Okay, Carissa, thank you, and to everyone, the analysts and investors on the call today and colleagues, I appreciate it. We had a good quarter. We look forward to talking to some of you that will see us in November. And we'll talk to you again at the end of the third quarter. Thank you very much. Have a great day.

Thank you very much. This concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.