Good day ladies and gentlemen, and welcome to the Apogee Enterprises Incorporated Q3 Fiscal 2017 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time [Operator Instructions]. As a reminder, this conference call is being recorded. I would now like to introduce your host for today’s conference, Ms. Mary Ann Jackson. Ma’am, you may begin.

Thank you, Christel. Good morning and welcome to the Apogee Enterprises’ fiscal 2017 third quarter conference call on Thursday, December 15, 2016. With us on the line today are Joe Puishys, CEO; and Jim Porter, CFO. Their remarks will focus on our fiscal 2017 third quarter and our outlook for fiscal 2017 as well as the acquisition we completed yesterday morning. During the call, we will discuss non-GAAP financial measures when talking about Apogee’s performance. You can find definitions for these non-GAAP financial measures in our press release. Our call also contains forward-looking statements reflecting management’s expectations based on currently available information. Actual results may differ materially. For information about factors that could affect Apogee’s business and financial results can be found in our SEC filings. Joe will now give you a brief overview of the results and 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 fiscal ’17 third quarter conference call. Once again we delivered strong quarterly results as we successfully executed our strategies to grow through new products, new geographies and new markets. At the same time, our backlog, awards, bidding levels support our outlook for sustained growth in fiscal ‘17 and beyond. With our continued confidence in our ability to deliver strong financial performance in fiscal 2017, we have increased our earnings per share guidance for the full year, while maintaining our outlook for double-digit topline growth. Our growth strategies include pursuing acquisitions that expand our market opportunities. And to that end, yesterday we closed on the acquisition of Sotawall, a premier curtainwall company with annual revenues of approximately $100 million. It's a great addition to the Apogee family and I'll provide more color on this strategic transaction after my comments on the quarter. Of course our results are exclusive of this acquisition. Our strong top and bottom line performance in the third quarter driven by our architectural businesses which are executing strategies for long-term growth in operational improvement. Our architectural businesses are operating well, increasing productivity and maximizing pricing and margins while leveraging volume growth. Our results reflect the position of competitive strength we've established in the commercial construction market. Our six architectural businesses in our three segments performed well in all aspects. Every business grew topline well above end markets, with improved gross and operating margins. Our lean initiatives are contributing to solid profit conversion and adding to our volume leveraging, resulting in triple-digit basis point margin improvement. And although our LSO business is experiencing soft end market, this business continues to drive impressive margins and has a terrific future as we expand into new markets with our intellectual property. And Q4…

Thanks Joe. Good morning. First on [indiscernible] I’m very pleased with our acquisition of the assets of Sotawall, which we closed and announced yesterday. We're excited to begin working with this very successful business which supports our strategies to grow through our - through expanding our geographic presence and adding new product offerings. It gives us another great brand and management team. And as Joe noted, this business lines up nicely with the M&A criteria that we've previously discussed. We had a great third quarter. We're driving topline growth as we continue to expand geographies served, introduce new products and penetrate new markets. Our quarterly revenues were up 15%, as we again outperformed our architectural end markets. Operating income of $33.3 million was up 19% on strength in our architectural segments and excellent operational performance across all four segments. Our outstanding operational results were somewhat offset by higher than normal healthcare and other insurance related costs in the quarter. Gross margin of 26.6% and operating margin of 12.1% were each up 40 basis points compared to the third quarter of fiscal 2016. Earnings per share of $0.78 were up 24%. I had a bit more detail on the quarterly segment results compared to last year. As Joe noted, we're now providing our backlog discussion by segment since it is more relevant to our business today. Investors have been encouraging us to rethink how we present and discuss backlog. We've heard you and we agree. Our mix of business today is different than it was when we started presenting consolidated backlog more than 15 years ago. Today almost two-thirds of our backlog is generated by architectural services segment, which represents approximately 25% of our revenues and it is a business that we’re deliberately growing more slowly as we focus on project…

Thanks, Jim. Before I take your questions, I'd like to underscore that we feel very good about the future opportunities for Apogee based on our bidding, our awards and our backlog as well as the external metrics Jim highlighted. The ABI, office employment, vacancy rates, all support sustained growth for our architectural segment. At the same time, the strategies we’re executing are making Apogee a more diversified and stable company than we've been historically. We are benefiting from our focus on mid-size architectural glass projects, the retrofit market and expansion within the framing systems segment, which generally serves small to mid-size projects. In addition, our disciplined, reliable, repeatable business processes are driving continued improved margins. We're not your Apogee, your father's Apogee. We are better positioned for longer term growth as we leverage the current market strength and exit our -- execute our acquisition strategy. As Jim mentioned, the Sotawall acquisition, not only provided us geographic growth, but it has very attractive margins. In his last comment, I'd like to repeat, even with the amortization that results from purchase accounting, that business will still drive operating margins next year at the level of our high margin framing systems segment. This is a terrific deal. Chrystal, I'd like you to open up the call for questions now please.

[Operator Instructions] And our first question comes from Chris Moore from CJS Securities. Your line is open.

Okay. Good morning, guys. A couple of questions on the Sotawall. So in terms of the kind of geographic footprint, can you be more specific there within the US areas that they have some strength that perhaps you don't at this point in time or where that will expand?

Yeah. So, they’re a Canadian based company, but they do significant amount of business in the northeast United States where our share of demand is less than it is in other parts of the United States. We're very pleased with that. We've got an opportunity to expand our presence in the Canadian market. I think you know we have a Canadian business, but that business focuses primarily on what's called windows and frankly primarily store entrance systems, which is doors. This is a curtainwall product, meaning the larger size products for the windows and walls on building. So Canada and primarily northeast United States where this will help us get to leapfrog our share demand.

Got you. Okay. With respect to the growing share of the mid-size projects, can you talk a little bit more about, I know it's kind of quicker turnaround, the competitive dynamics there versus on the larger side, are there different players that you're competing against or kind of help us understand what you're seeing there?

Yeah. Good question, Chris. So when I came here, our largest business, our Viracon glass segment business, nearly two-thirds of their revenue and hence nearly a third of Apogee’s revenue was concentrated in large office towers, Class A commercial towers of greater than 10 stories. Frankly, most of that was greater than 20 stories. So think of very, very large metropolitan buildings. That is the most volatile or let's say has the greatest peaks and valleys within the commercial construction cycle. Today, that is approximately only a third of Viracon and our glass segment and less than 9% of Apogee. This bodes well for us, meaning, we've moved down into this mid-market buildings five to ten stories. It's the same customer base. It requires consistent strong delivery of that six to seven week time, which half a decade ago, we were not able to do with the investments we've made. We are executing extremely well in that category with current customers, meaning, existing customers and it's been a very successful effort for us. It is also far more difficult for international players that are enjoying a very strong US dollar right now, because the lead times are nearly impossible to hit for non-domestic players. So we’ve made great strides in this segment to not only offset any share loss in the massive towers, but to make us less dependent on the most volatile segment in commercial construction. So it bodes well for our future.

Awesome. And the last question, are the margins much different mid-size versus larger buildings for the glass?

Same exact margin profile. They’re looking for high quality glass, these are really wonderful buildings. They just need faster lead time and we're able to do that with our US footprint.

Thank you. [Operator Instructions] And our next question comes from Sam Eisner from Goldman Sachs. Your line is open.

Yeah. Good morning, everyone. Hey, so can we talk a bit about the framing segment and the kind of the significant acceleration that you've seen in the backlog there. Is there anything, is that Alumicor that's been driving that up in Canada, are there other things going on in that segment. It just seems as though, in the last three or four quarters here, your order intake for that business has materially stepped up. And so I'm curious if you can give some color on kind of what's really happening beneath the service, because there are a couple of businesses in that framing segment?

Yes. Sam, there are four businesses, now, five, with the Sotawall acquisition and there's no question, we have strategically been focusing on expanding our presence and capabilities that has been our largest investment thrust for us for a couple of reasons. The margins are attractive. It is far more fragmented. So the share demand profile, there are many, many regional players. If you have a high quality company like the four, now five businesses under the Apogee umbrella, you can gain share and we've been doing that. All four of the existing businesses are growing substantially on the top line and bottom line. Your comment about backlog, again this is more of a faster turn business. So the increase in backlog reflects real true long term revenue growth potential in that business. Within the business, our window business based in Wausau has the longest lead time and we've had tremendous success in growing that business in the United States. So Sam, all four businesses are growing significantly and that has contributed to the revenue growth and the backlog. This business can be lumpy as well and we have that warning, but it does not have that dynamic that our services segment has with the lumpy sales, as Jim pointed out. And I tell you guys all the time, I have great visibility to what should be entering backlog. We purposefully highlighted our focus on the services segment as Jim mentioned. It’s two-thirds of the backlog. Right now, I have -- I believe more work in contracts and review, meaning awards that are going to go into backlog going into a quarter than I'd seen since I started here. So unfortunately, it wasn't a smooth year for services. When the year is over, this business will have grown nicely. I will simply say, I expect a substantial increase in backlog, actual backlog entering the services segment in Q4. I am telling you that now I'm not going to brag about when it happens. We have seen strong momentum in project bidding and award activity in the third quarter. More work is being released to the street in both this segment and in framing systems. So long way around the barn, all four businesses in framing systems are growing nicely. The backlog bodes well for F18 and in our services segment, the backlog growth I'm forecasting bodes well for F19 and F20. I do wish we had a more smooth quarter-by-quarter flow to that, but when the year is over, I think you're going to be impressed with our services segment backlog.

Sam, it’s Jim. Just, I’ll provide just a couple of other comments on the architectural framing systems backlog, which is two things that are going on within those businesses is over the last two years, we've been increasing and upgrading the sales force really in all of those businesses, combining what you hear us talk a lot about project selectivity and really implementing targeted focus project selectivity and those two aspects combined in terms of the people and the focus, we have seen an increase in our hit rate in those businesses, which is helping us drive the increase in order flow.

And Sam, it’s Joe again. I know, you like to talk to me about backlog and it's not like we're not providing the data. The only backlog we don't present is our LSO backlog, which is frankly irrelevant. It's 1 million or 2 million every quarter, because it's a, has a three day lead time. So, we’ve provided that in the Q as well. So we're providing the full backlog, but we prefer to discuss it by segment.

Great. And maybe just continuing on it, that was extremely good color there. You guys used to give kind of the amount of the backlog that would be delivered in the current year and the upcoming year. Is there a way to parse that out on a per segment basis, obviously understanding that the services backlog, you book the entire value of that business into backlog at the time that you signed the contracts? So I'm just curious how far out does your backlog extend if we can just get a phasing of when you expect to deliver on I guess on a per segment basis on those backlog that would be great.

Yeah. I think we're going to have to follow-up on that. Nothing unusual, Sam. Most of the, let me go around the horn, in the glass business, most of our lead time, most of our backlog shifts within seven weeks, six to seven, eight weeks of when it enters. So, we enter the quarter with six, seven weeks of backlog, we’ll exit the quarter. So most of that, half of that shifts in the quarter and the other half will be in the first quarter. The services segment, the backlog is primarily for the next year and beyond. Most of the awards I’m highlighting that will be extremely strong in Q4 will be for F19 and beyond. But again, we bring in roughly a round number 60 million in revenue a quarter in services. It's not so lumpy. The backlog will be substantially higher than the $60 million. So again most of our backlog is for the future and our framing systems, it’s probably half and half.

Yeah. It’s roughly half and half in the framing systems for this year and for beyond.

Got it. And maybe just a couple of quick follow-ups here, on the mid-size initiative as well as movement into retrofit, can you guys give us kind of flavor of kind of how big those respective businesses are today, either percentage of revenue or in dollar terms and how that compares to maybe 2, 3 years ago?

Yes. So let me do the retrofit first. Three years ago, I began -- three, four years ago, I began our initiative on retrofit. As Jim and I have said to you and everyone else, we have always participated in renovation work of 25% of the revenues are buildings that are being renovated, general contractors hired works out for bid. It's just like new construction. What we embarked on here is a new initiative retrofit to work with building owners, energy Performance contract companies, facility maintenance firms to convince people to use our products and technology to drive energy and aesthetic improvements that are energy saving and aesthetic improvements to actually go and work with us for a solution to upgrade their building. We expect to do about $40 million this year in orders from zero three years ago. We are on track to achieve that. We have amped that number up every year. I stated publicly. I expect this to have three digits to the left of the second comma. So I expect it to be a $100 million opportunity for us in the future. It takes a long time. I had hoped to be there in three, four years. It's going to take longer than that, but every year, we'll do more than that $40 million and a great momentum we’ve added to the team. In the small project world, we virtually were an insignificant player in, I'm sorry, the mid-market segment, in our glass segment. We had a strategic initiative to do more than $50 million in that segment this year. We are exceeding that goal for fiscal ’17. I would simply range it to say it’s in the neighborhood of $50 million to $75 million, Sam.

Thank you. Our next question comes from Jon Braatz from Kansas City Capital. Your line is open.

Good morning, Joe and Jim. Turning back to Sotawall, I was on their website yesterday and you alluded to it, Joe, that they have some proprietary products that you might be able to leverage here domestically and can you talk a little bit about that? And the other thing was on their website, they show a facility in the Philippines. Can you talk a little bit about that too?

Yeah. I’ll let, Jim might be able to address the Philippines. Listen, here's the bottom line. I mentioned the company is a wonderful company. They deal with some significant customers in the US that we are very familiar with. We are looking forward to that relationship continuing unabated. We have a similar business in the US called Wausau as part of our framing systems segment. In other parts of the US, where Sotawall is not competing, we'd like to take their proprietary technology and leverage that. With Sotawall, potentially as the manufacturer, but through our existing businesses in the US, in parts of the United States where Sotawall is not competing today and leverage that product technology for our existing businesses. So it's a win-win scenario. We love the customers they have in the United States. That relationship will continue. I've talked and we've met with each of them, all of them I should say and we're pleased that that will continue and those are in geographies where we've traditionally not been very strong as I mentioned on the call. So we have some great technology products as well that we expect to introduce to the Sotawall organization where they can use with their existing customer base. So we’ll be very careful not to overlap and get multiple bites of the apple as we expand our presence across the US.

Jon, it’s Jim. I'll address your second question as it relates to Sotawall activity in the Philippines. They had a strategic relationship with an entity that was based in the Philippines, serving a few projects several years ago. They haven't done any business with that entity for years and it was not part of the transaction.

Okay. Okay. And then lastly, in terms of capital requirements for Sotawall, in terms of their facilities and so on, how does they stack up? Will you need to make any additional, I mean, any sizable capital investment into Sotawall?

Jon, no, we won’t. The owner has invested heavily their factory frankly factories, but their primary factory in the Toronto area, state-of-the-art, the SOTA, state-of-the-art is, their name is appropriate. They have made significant investments in automation and their CNC operations. It's a new facility. It's pristine. It's well run. A long way around the barn, we do not see needing to make halfbacks in their factories. Obviously, we have the CapEx capacity and wherewithal to do such, but they have not needed help up till now and we believe they're fine going forward. We frankly can learn from some of the investments they’ve made and leverage that back to our factories south of the Canadian border.

And the existing capacity supports opportunities for growth.

Yeah. It's a gem of a business, Jon. Chrystal, are there any more questions.

No, I'm showing no further questions at this time.

Okay. So everyone listen, thank you for dialing in and hearing our story. You can tell from our results and my forward-looking comments that we'll be looking forward to talking to you again following our, what I expect to be another terrific result of, in our next quarter, our fourth quarter. Thank you all. Have a terrific day and a safe holiday season. Thanks.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. You may all disconnect. Everyone, have a wonderful day.