Good day, ladies and gentlemen, and welcome to the Apogee Enterprises Fourth Quarter Fiscal Year 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.

Kaylee, thank you. Good morning and welcome to the Apogee Enterprises’ fiscal 2017 full year and fourth quarter conference call on Thursday, April 13, 2017. With us on the line today are Joe Puishys, CEO; and Jim Porter, CFO. Their remarks will focus on our fiscal 2017 full year and fourth quarter results and our outlook for fiscal 2018. 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. More 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 then Jim will cover the financials. After they conclude, Joe and Jim will answer your questions. Joe?

Thank you. Good morning, everyone. Welcome to Apogee’s conference call for our fourth quarter and yearend. Our fiscal 2017 was another record-breaking year at Apogee and after five years at the helm of this business, I am quite pleased with our journey to be a different and better company and the results of our efforts to reengineer Apogee to meet ambitious growth goals and to outperform the market and most importantly to deliver terrific results. As I said, we are a different company, thanks to our initiatives in geographic growth where we've gotten quite a bit of more business in Canada through primarily our M&A efforts, Southeastern United States through our NPI, in the Northeast through expansion of offices, our distribution growth in Europe for our large-scale optical business and in Texas through operational expansion as well. We've also grown our framing systems significantly and going forward, this will be our largest segment, which is less cyclical and more fragmented both good things. Our NPI has continued to evolve, where greater than 20% of our annual revenues come from new products introduced in the prior five years. This is a significant investment and improvement in Apogee's performance. Our retrofit initiative is now a $40 million business contributor and I can -- and this will be a $100 million annual revenue business in the future. Our mid-market growth in our Viracon glass business where we had significant share gain has more than offset our share loss in the massive projects and as I've repeated many times, this segment is far less cyclical than the large Class A commercial towers. Our new markets for our true view custom framing business, custom picture framing business where the engineered optics and other products making this mature market continue to be a very strong highly…

Thanks Joe. Good morning. Fiscal 2017 was another record year for Apogee and our operating segments performed well in the fourth quarter, allowing Apogee to deliver full-year revenues at more than $1 billion for the first time in our 68-year history with an operating margin of 11% well above our previous peak of 8.4%. Before I discuss fourth quarter results, I'll provide some additional color on the fiscal 2017 full-year performance to add to the highlights Joe has covered. Fiscal 2017 revenues grew 14% as we leveraged our premium service levels along with growth in new geographies, new products and markets to outperform our end markets. Excluding partial fourth-quarter revenues from the addition of Sotawall, Apogee's full-year revenues were up 12%. Operating income for the year was up 25% led by our architectural segments as they executed lean productivity, automation, project selection and pricing initiatives. Our fiscal 2017 operating margin for the full year was 11.0%. This is slightly below our prior outlook, largely due to the fourth quarter factors that Joe mentioned and I'll provide a quick reconciliation. First, I'll note that our prior outlook did not include the impact of Sotawall, which we indicated would initially be dilutive to operating margin due to the amortization expense. This had approximately 10 basis point impact. We had higher than what our normal levels of corporate costs in the quarter for insurance and warranty items along with strategy and M&A support costs. These all accounted for approximately 30 basis points a bit different and then higher than expected aluminum prices in the fourth quarter impacted the full-year operating margin by approximately 10 to 15 basis points, affecting our framing system segment. Earnings per diluted share of $2.97 were up 34% for fiscal 2017. The earnings per share includes approximately $0.06 per…

Okay. Thanks Jim. Before I take your questions team, I'd like to underscore that we feel very good about the future opportunities for Apogee, again based on our bidding awards and backlog as well as our external metrics that Jim just highlighted, the ABI, office employment and vacancy rate, all sustained -- support sustained growth for architectural businesses and with our visibility, we feel good about multiyear growth. At the same time, the strategies we're executing around geographies, new products and new markets are making Apogee a more diversified and stable company than we've ever been historically. We are specifically benefiting from our focus on midsized architectural glass projects, the retrofit market and framing systems growth, which generally serve small to midsized projects. In addition, our disciplined, reliable, repeatable business processes we are driving improved margins. As you've heard, we are anticipating yet another year with triple digit basis point improvement in operating and gross margins. In summary, we're better positioned for the long-term as we leverage the current market strength. And with that, Kaylee, I would like to open the call up for questions for our guests.

[Operator instructions] Our first question comes from the line of Eric Stine with Craig-Hallum. Your line is open.

Good morning, everyone.

Good morning, Eric.

Good morning, Eric.

So, I just wanted to dig into the revenue guidance a little bit to see more color if I back out Sotawall. It looks like it's looking at a little over -- between 4% and 5% year-over-year growth. So just to clarify, that is solely based on timing in the installation business. Is there anything -- just color, is there anything going on in terms of pricing of those projects since I know one of your initiatives is certainly to be much more -- much more clear or regimented in the type and profitability profile of the project that you do take.

Yeah Eric. This is Joe. I am going to have Jim give the specifics on the numbers in a moment, but let me just say the 10% growth, approximately 10% growth on revenues year-over-year that we articulated certainly includes the impact of the full-year of Sotawall versus approximately one quarter in the comp period. But when you peal back the onion, you'll see solid growth in our glass segment, substantial growth in our framing system segment, even excluding Sotawall flattish in large-scale optical and a decline in services, which should be no surprise anyway and based on the kind of the timing of how orders entered backlog, we had three quarters in a row of reduced backlog in the services business. We highlighted that would come back. It did come back with a vengeance in Q4. I articulated earlier in the call that I'll go out on limb again and say that we will start fiscal '18 with continued momentum as to positive backlog performance and services. We have a whole for F'18 that Jim can describe, but I believe fiscal '19 will likely be a record year for our services business, which is our installation segment. Jim can repeat some of the specifics for your model.

I think Eric to your point, it's really the relative low growth rate given the inclusion of Sotawall business as really just driven by the decline in architectural services as Joe just described. The other architectural businesses we are projecting to grow better than our end markets and in the framing systems even excluding the impact of the acquisition for the full year is still double-digit growth in that segment excluding that impact.

Okay. Thank you for that. And maybe just turning to the materials cost, it sounds like you have kind of rectified that situation. Just wondering if there's been any pushback from your customers or is that something that fairly standard people get and if that is -- that you'll maintain on passing that on?

Yeah so Eric, we have -- you're a little newer to us than some folks on the call and I am going to provide a little bit of background to repeat for a lot of people. We have a lot of aluminum usage some of which is our projects business where we forward by everything as soon as we're awarded a project. So, we have very limited exposure to short-term pricing at aluminum in our services segment and in our large window and wall framing system business, but we're a significant user in our store front and entrance system, which is housed in our framing system segment and that is a very, very quick book and bill business. Order turnaround in less than a week and we are exposed to short-term spikes. Traditionally our industry has been horribly slow to pass on price costs increases in the form of price. We buck that trend two years ago in the calendar fourth quarter of 2015. Our competitors followed. We were equally slow to pass on cost reductions as well and benefited in those times. We made a very quick action when it was obvious that these increases in our fiscal fourth quarter were not going to go away. We implemented a price increase within the last 30 days. We are seeing competitors do similar. We're confident we've implemented enough price increase to completely offset that cost increase for the fiscal year and I think it's reflective of a better discipline, a better pricing discipline in our framing systems business.

Okay. Perfect. That is the color I was looking for and then lastly for me just on the product side, the oversized glass capabilities, is that still the plan to start shipping that in May and just any color on the demand that you're seeing in advance of that in the market would be helpful, thank you.

Yes. We being shipping in the middle part of this calendar year. The project is a little bit ahead of schedule. It is on budget. We are slightly ahead of the orders projections that we had justified the project. Our Board of Directors had approved this project based on volume projections. We are slightly ahead of that and full steam ahead we're feeling very, very good about that substantial investment in our glass business, which is coupled with automation investment as well, which is equally important for us.

Okay. Got it. Thank you.

Thank you.

Thank you. Our next question comes from the line of Chris Moore with CJS Securities. Your line is open.

Great. Thanks guys. Good morning.

Good morning, Chris.

Can we talk a little bit more maybe about the purchase accounting effects for Sotawall in for fiscal '18, just trying to get a sense as to how significant some of that amortization is and looking at the 8K from the end of February, you had some pro forma numbers and trying to understand what '18 would look like, so that we can model '19 as it flows through and that stuff -- those kind of costs go away?

Yes, sure. Chris, thanks for joining us. First of this is Joe. As much as I love purchase accounting, I'm going to allow Jim to steal all my thunder on this. Jim fire away.

So, Chris. First of all, as you know the pro forma in the 8K accounting aspect of it which are not necessarily represented of in terms of amortization as handled to me actually kind of closed the books, but I think the key point when you look at it is we're going to see in fiscal -- our form 10K will be out at the, should be out at the end of this month and you'll see more of the details. But including there what you'll see is an increase in the amortization expense from fiscal '17 to '18 of close to $10 million and then as we project like assuming all else equal going from fiscal '18 to '19, you'll see that start to ramp down to more of a $5.5 million annual amortization level in fiscal '20. So, heavy burden in fiscal '18 into the first half of fiscal '19.

Okay. All right. Thanks. On the framing operating margins, obviously, it's a couple of things going on there that the Sotawall's in there, there is the aluminum pricing and then I am trying to get a feel for -- then the rest of it which is project mix.

Yeah on a year-to-year comparison, in the fourth quarter last year, both mix of businesses within the sector and project mix within those businesses was quite strong Q4 of last year and just didn't have the same line up of favorable margin mix within that on a quarter-to-quarter basis.

Yeah across the Board Chris last year, we had -- our fourth quarter was our most powerful year. So, we had really challenging comps. We made 9.9% operating margin for the year. We achieved 11% in the fourth quarter. So unfortunately, in the construction industry, we don't have -- although we draw 140 basis points, we don't necessarily get it in the steady flow each quarter. So we had incredibly strong results to comp. We had a very solid fourth quarter. Our framing systems business, to elaborate a little bit more on the Sotawall, that's an extremely profitable business with the amortization in the first year and a half, two years. It drags it down to slightly lower than our extremely strong framing systems margins today. It's approaching that level, but it's a little below. When we get past this early amortization, it's actually accretive to the framing -- to the already strong framing systems margins, but in these early periods, it is a bit of a dilution. It's still strong.

Got you. All right, guys. I appreciate it.

Thanks Chris.

Thank you. And our next question comes from the line of Brent Thielman with D.A. Davidson. Your line is open.

Thanks. Good morning.

Hey Brent.

Hey Brent.

Joe or Jim on the services segment, how are you thinking about your ability to potentially sell in some of these whole schedules in early fiscal '18 and what would prevent you from being able to do that?

Well, it's a long, this is Joe, it's a long lead time business Brent and I can assure you the team is looking at some smaller projects that would have a quicker turn, a typical turn time from award or entry into backlog to revenue is anywhere from 12 to 24 months depending on the project size and schedule. We as we've seen from the obvious strong book to bill in the quarter, my comments that will have an equally -- will have a very strong first quarter, early part of the year. We are setting up well. The team is working very hard to try to fill the gap that we built our plan around. So, we have in fact built our annual operating plan and the numbers Jim provided for guidance do assume this gap in fiscal '18 revenue. The team will manage it well. We need to keep the people on for these incredibly strong volumes we'll see in F'19, but the team still has a little bit of time to try to find some small orders that will turn quickly and fill the gap and I can assure you max efforts go into that every day.

Brent, also the primary gap that we have in that business and actually the first half of fiscal '18, so what we see based on the schedules that we have in front of us in the second half of the year will be comparable or maybe even a little growth over the second half of fiscal '17 and so the gap that we have as we saw these orders that we're working on in fiscal '17 move out in time to move the opportunity from the first half of fiscal '18 out into the future. And as Joe said, that shorter lead time work has stopped to fill into that business.

Okay. So, I guess the gap reflects the worst-case scenario and potentially it's pick up some work to meet in the first half, but there might be some upside to that, is that fair?

The upside would be if we fill in more in the second half of the year.

Okay. And then I am sorry Jim, I didn't catch it, but the margin expectation for the glass business for fiscal '18.

Yeah what we try to offer fiscal '18 is about 50 to 100 basis point improvement in margin over fiscal '17.

Okay. And I guess just curious I think pricing is up, bid margins are up, been on the right trajectory, where are the stops in the long-term potential of that business? Are we peeking in terms of profitability?

Peaking in the services segment?

Glass.

And glass, where we continue to make investments to improve our cost position. So, our productivity, our investments in automation will continue to give us opportunity to improve our margins as we continue to expand in the mid-market segment, we'll continue to hopefully have volume leveraging as that business grows. So, I would never accept that we can't continue to improve our cost structure.

Yeah pricing as on an apples-to-apples basis has I would say leveled out to a certain degree, but then it really comes down to really project mix and we aren’t talking about those two together whenever we're able to move towards differentiated products, oversized products, those types of things that have higher margin profile, but still maintaining good pricing, moving to better mix, but as Joe said, continuing to see the benefits of products every day.

Okay. And then can you give us an update on what you're seeing in terms of some of the foreign competition that I think has gone after some of the higher profile work? Is any of that starting to ease with the dollar softening a bit here?

We have not seen a lot of change. We have -- the momentum certainly leveled off for the other side. Not certain it's retracted yet, the slight improvement in the exchange rate between your own here, but again I tell my troops bring on the competition, we should be able to compete with anybody in the world. We are the most capable glass fabricator in the United States and we're willing to take on competition. I would say it's certainly leveled off, but I'm not certain it's retracting yet.

Okay. And then just on LSO nice quarter here in terms of growth, but the expectation for flat growth in this coming year or the current year, why that's something better than that just given some of the growth initiatives you've kind of put in place there?

Yeah, we're trying to offset a very, kind of a stagnant custom framing market. We do have significant growth opportunities. I hope we can grow that business. We've built a plan around flattish. We'll continue to make smart investments. We have a new engineered optics product line that gives us opportunity to do exactly what you said, which is project growth in fiscal year. We've got some new acrylic products for our custom framing world. We're working very hard to spark some growth in a mature industry and I continue to feel very, very confident about our cost position that allows for these strong margins. We successfully implemented a brand-new ERP system in that business in the last quarter. Don't have to talk about it because I've been through many ERP implementations, the smoothest one I've ever been part of and I'm confident we have the opportunity to do better than our plan.

All right. Thanks guys. I appreciate it.

Okay Brent.

Our next question comes from the line of Sam Eisner with Goldman Sachs. Your line is open.

Hey. Good morning, everyone.

Hey Sam.

Good morning.

So just going back to the glass commentary, you guys are guiding to 50 or 100 basis points of margin expansion. I think through the back half of fiscal '17, you only had about 50 Bps and certainly you were flat exiting the year. So, I guess what gives you confidence in margins expanding from here particularly given that you have this new initiative over the last few quarters of going into kind of the mid-market. Maybe you can talk through price mix, raw materials to help us get more comfortable that you can achieve the 70-basis point or 75 basis point midpoint for that?

Yeah Sam, two ways. One is we have visibility to both backlog and the commitments in terms of the margin profile of the business that supports it and you've seen the improvements that we've made in that factory and we still have runway to go in terms of recognizing the benefits from the automation that has been put in place that we continue to put in place and various other productivity initiatives.

Sam, the automation you got to peek at when you were down there few quarters ago goes live in about 60 days.

Got it. That's helpful. And so, the impact of moving from large projects into mid and small projects, is there a way to access the ASP differential, the margin differential, just getting a better understanding of this move arguably into smaller projects what that means from a mix and ultimately price perspective for you guys?

Very similar margin profile and cost profile Sam. These are the same customers we've been dealing with for 40 years. We just never were quite capable of delivering in the shorter lead times. So, the margin profile is the same. It's capability that has allowed us to penetrate this segment where we now are consistently delivering glass and custom coated glass in five or six weeks’ lead time and that is something international competitors would never be able to do.

Got it. On maybe transitioning over to Sotawall, I think if you look at the information that you guys provided in that 8K, I think through the first 11 months of this year, the EBIT margins for that business were 32%, 33%, but the year ago it was 10%, I think the gross margins are up from 31 last year up to 39%. So, what's causing the substantial step up in the profitability of Sotawall if I read those numbers correctly and I guess how do we think about the look of that going forward? Obviously, you mentioned that's a very strong EBIT margin business, the amortization impact will bring that down, but because there is such a big differential between those two years, what's the best way to think about it?

Sam, I don't have specific information. In the 8K there were two sets of documents. One were some historical financials that were accounted for according to Canadian GAAP accounting if you will. The pro forma reflected the business as it has been operating as it has been coming into our business and it's an attractive operating business and looks to continue to be so. I can follow-up with you and reconcile that material we're into.

Yeah that would be great because I think increment for taxes was almost $40 million through November 30 of this year. Last year it was only $10 million. So that's a pretty substantial step up in terms of the profit that you guys generated or at least that Sotawall generated. So, I am just curious were there some product timing for that business? Was there something related to new wins improvements just to better understand the history of Sotawall.

Yeah, it's a projects related business. It has different timing in terms of where the maturity of the project is when you recognize the upsides to it and then also the numbers that I think you're referring to were in Canadian dollars as well.

Got it. That's helpful there. Maybe just a few other questions here, just on the services backlog, obviously a really nice order quarter in line with Joe your comments here. I think if you look in aggregate, the $125 million of orders that you receive this quarter is basically the sum of the prior four quarters here and now you're guiding even stronger orders next quarter. So what happened? What's the release? What's the catalyst to allow all these orders to come into your backlog, is there something market related that's allowing for that or…

Sam, it's just the world we live and project timing. When they release every project is run by a different general contractor and being lead at different times. I've said repeatedly, we don't cut corners on Ts and Cs, terms and conditions, just to get something over the finish line. Obviously when I said we would have substantial increase in orders, I was aware of what was about to cross the finish line. It's nothing more basic Sam than the timing of when things slow and the projects, the handful of projects we're actively pursuing, I would say our win rate was good. There are times where the bridesmaid at a few weddings in a row and then can have a win streak. We did nothing different with our pricing or our Ts and Cs to make that happen. It's simply part of being in the project's world and commercial construction Sam. It's unfortunately that simple. I wish it was -- I wish it was a smoother flow by quarter. It is one of the frustrating things of being a public company and having that business in the portfolio, which is why we want to maintain our focus on margin expansion. We're doing extremely well in that front as you've looked over the last four years and the steady growth, but I submit in that business you have to look at trends over a longer period of time than a quarter for certain.

All right. Maybe just one last housekeeping question Jim. The 14 weeks for this quarter or 13 weeks last quarter or last year, just the number of days different there we get three, is that correct, just trying to confirm the impact of the additional selling days?

Yeah, I think that's about right.

Okay. Thanks so much.

Thank you, Sam.

Thank you. And our next question comes from the line of Jon Braatz with Kansas City Capital. Your line is open.

Good morning, Joe and Jim.

Hey Jon.

Jim, you mentioned in the quarter's additional corporate cost and one factor you talked about or you mentioned was increased warranty costs. What's that related to and was it substantial at all?

Well overall I talked about insurance and warranty was substantially. I think it was about 30 basis points full year impact, it’s about a few million dollars and then warranty is just, we normally have warranty reserves and in the quarter, we had a few older projects that was higher than normal activity to some degree related to some disagreements with customers that we were dealing with that got that behind us we believe.

Okay. So, there were sort of I want to call it true ups to these projects.

That's our view on it yes.

Okay. Okay. So, nothing that would reflect something going forward change in your warranty expense.

We do not believe so.

Okay. Okay. And Joe, the other question is obviously we've all talked about a lot of businesses since the election and there seem to be a little bit of a sentiment change, little bit more optimism whether in fact it takes place and whether in fact things do get better or not who knows, but in your conversations with architects, with your end markets customers, did you get any type of sentiment change from your customers after the election, there are the animal spirits developing a little bit more than they have in the past. What are you hearing from your customers?

Jon, we've been on that issue and I would say there is no question in general. I wouldn't say specific architecture general contractors or delays in contractors or fabricators, but across the Board in general there has been since the administration change, there's been a little bit more upbeat feeling on business-friendly agenda and I would say that things were going along fine. We felt good about a few more years of sustained growth before any flattening out and I would say what we hear from our constituents that we just talked about is that, that sustained growth probably pushed out another year or two and that hasn't changed. So I -- there's no question it's been a slight positive, certainly emotionally obviously in this world we live and things change in a hurry, but I think it pushed out any slowdown or downturn and I would be very clear on my anticipation is that the next slowdown in our end markets will be far more muted than what people have in their memory from six, seven years ago and that no buildings are going up now that don't have high tenant occupancy commitment that is substantially different than the buildup before the last crisis let's call it. I do feel confident that the next downturn whatever comes will be far more muted in normal, but we do believe based on the confidence in the business-friendly environment that may be coming that we've got a few more years of growth because of that.

Okay. All right. Thanks Joe.

Thank you, Jon. We got time for one more operator, so please.

Our next question comes from the line of Scott Blumenthal with Emerald Advisers. Your line is open.

Good morning, Joe, Jim and Mary Ann.

Thanks Scott. How are you doing?

Okay. Joe was there anything more to your comment that framing is ultimately going to be Apogee's largest business than the addition of Sota or you may be seeing something in architectural design trends or maybe something other out there in the market that allows you to make that comment?

No, it's just the fact based on revenue dollars. F'18 it should be bigger than our glass segment. Of course, it's by businesses housed in that segment versus glasses. Glass is our largest individual operating business unit run by a leadership team. It is certainly the big dog in the canal, but the combination of our framing systems businesses will be the largest revenue segment that is certainly not by accident. We've done several acquisitions. We bought a custom window business three years ago, two and half years ago. We bought Alumicor three years ago now. We've had the Sotawall acquisition all in that space. Why it's fragmented, its profitable. There is substantial room to grow. I should be able to grow in that segment regardless of the end markets because of the fragmented customer base. And it's not indication that we are less focused on glass or services or LSO. It's simply the smart place to make some big investments due to that fragmentation and we highlighted on this call, we have many irons in the fire. I think between continued M&A potential and organic growth; the opportunity just happens to be most significant in that segment.

Okay. Got it. That's really helpful. Thank you. And since you were on the subject, one more if I may, can you give us anything with regard to the acquisition pipeline maybe the magnitude of some of the deals that you're looking at maybe your expectation or probability that you might be able to get another one done this year?

Well I can try. I can tell you that we have a disciplined, reliable or repeatable business process around M&A pipeline. I like to say we look at 100 properties due diligence on 10 to get a deal done. We will not do a bad deal. I walk away from 10 good ones before I do a bad one. I was trained to do that. We do have a lot of -- we have some irons in the fire. I feel good about our opportunities. Our debt to EBITDA ratio is still extremely low and we continue to be under-levered. I am okay with that. You've heard me say, I have no desire to get drunk and disorderly. We have the bandwidth to do more. We have the management capability to get it done and as you've seen with our track record -- with Sotawall, we're buying great companies with great leaders. I'm not foolish enough to think we're going to buy a broken business and use our intellectual prowess to turn around something that's not working. We have a process in a way of going about finding good properties at an attractive value where we can leverage our core businesses to share best practices back and forth and make one and one be more than two. I do feel confident in our pipeline. Stay tuned.

Okay. I appreciate it. Thank you.

All right, Scott. Go ahead operator?

I am showing no further questions. I would like to turn the call back to Mr. Puishys for closing remarks.

Thank you. We're out of time. So, I am going to wrap up quickly here and simply say thank you. I hope we've answered all your questions. It was a powerful quarter and a powerful year and Jim and I have given you guidance on a triple digit basis point improvement coming for us in F'18 with strong revenue growth and hopefully you will have confidence in us as we do ourselves and have a great day everyone. We look forward to talking to several of you individually. Take care. Thank you.

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