Good day, ladies and gentlemen. And welcome to the Apogee Enterprises’ Second Quarter Earnings 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. I would now like to hand the floor over to Mary Ann Jackson. Please go ahead.

Thank you, Karen. Good morning. And welcome to the Apogee Enterprises’ fiscal 2018 second quarter conference call on Tuesday, September 19, 2017. With us on the line today are Joe Puishys, CEO; and Jim Porter, CFO. Their remarks will focus on our fiscal 2018 second quarter results, our outlook for the fiscal 2018 full year and our strategies for transforming Apogee. Slides to supplement the information we are providing in our conference call remarks can be downloaded from our website. The PDF is located adjacent to the webcast link. 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. We called out adjusted earnings related to our recent acquisitions and tables reconciling non-GAAP financial measures are included in the 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 the Apogee’s business and financial results can be found in our SEC filings. Joe will discuss Apogee’s strategic transformation and then Jim will cover the results. After they conclude, Joe and Jim will answer your questions. Joe?

Thank you. Good morning, everyone. And welcome to Apogee’s second quarter conference call. I would like to highlight some aspects of our business today. First off, Apogee is in the process of executing a transformation strategy, which I have commonly called we are not your father’s Apogee. We are reshaping our business mix to deliver more stable performance through any economic cycle. This strategy is centered on our Architectural Framing Systems segment, which today is our largest segment following the acquisitions of Sotawall and EFCO. This segment has consistently grown organically and profitably over the past five years, with revenue, compound annual growth rate of 17% and operating margins nearly tripling. It also grew revenues and maintained positive margins throughout the last downturn. The segment serves a broad spectrum of the non-residential construction market in terms of products, project size and geography, and is more similar to the overall market profile than our other two architectural segments. In the second quarter we just completed Architectural Framing Systems segment growth was 105%, with the two acquisitions and I am most pleased that the existing businesses in these segment, those that are in our base last year grew revenues 17% and margins by approximately 200 basis points. As we work to improve EFCO operating margins to double digits and generate synergy savings of $10 million to $15 million at EFCO over the next three years, I believe that the Architectural Framing segment will be Apogee’s fastest growing and highest margin architectural segment, while at the same time being the most stable performer across the economic cycles. Second, we continue to believe that North American commercial construction market will grow through our fiscal 2020 based on our businesses, how they are seeing end markets, what we are hearing in the marketplace from architects…

Thanks, Joe. Good morning. We are excited to have added EFCO to our Framing Systems portfolio this quarter, despite some initial challenges we discussed with you last month. We like this business and it complements our strategies for growth and end market diversification. We remain confident that we can achieve $10 million to $15 million in annual synergies and drive margins to double digits in three years. We also continue to see positive North American architectural markets combined with good fundamentals that reinforce our view for multiple years of end market and company growth. Regarding the quarter, our second quarter performance was largely in line with our internal expectations. Second quarter revenues grew 24% with the addition of revenues from our recent Framing Systems segment acquisitions. Second quarter revenues from all the existing Apogee businesses were down 6% in the quarter, held down by the lower Architectural Services revenues. Revenues in our Architectural Framing Systems segment more than doubled and revenues for the existing group of businesses was up 17%. Architectural Glass revenues were down slightly, domestic volume increased with growth in midsize projects, offset by large project timing delays and lower international sales. Architectural Services revenues were a bit lower than expected due to normal commercial construction job site delays and active construction project with adjusted job sites schedules not in our control. Earnings per diluted share were $0.60 a share and adjusted earnings per diluted share were $0.75 a share, which were down 3% from the prior year period. As we started including last quarter, a reconciliation of adjustments is included in our press release tables and supplemental slides. Included in our adjustments, our acquisition-related costs and amortization of short-lived acquired intangibles associated with the acquired backlogs of Sotawall and EFCO. We don’t adjust for interest expense, but…

Thanks, Jim. Before I take your questions, I just like to reiterate my opening comments on our core strategy. First, we’re in the process of transforming Apogee’s business mix, one that delivers more stable performance. This effort centers on our Architectural Framing Systems segment which has grown steadily, and with the acquisitions of EFCO and Sotawall is now our largest segment. Its margins had been the best amongst architectural segments in this cycle recovery and we expect this segment to be most stable going forward. Second, we firmly believe the North American commercial construction markets will grow through our fiscal 2020 at least, notwithstanding an unexpected impact to the general economy. The fact that our first half topline is flat excluding our acquisitions does not reflect our view of the end market is primarily a result of the timing of the work we won and timing of the daily challenge in the construction world. Our sales people are in the Architectural offices daily and work closely with customers and we feel good about the bidding opportunities in our markets and the corresponding margins. In addition, our reported backlogs have grown substantially and external metrics continue to be positive. And finally, I’ll summarize positioning of our other three segments. Architectural Glass continues to be the U.S. market leader, with the sector model that will make its revenue smoother over a cycle. Architectural Services with its lumpy order and revenue flow has become a smaller part of our business, and as a result, the Services performance does not indicative of Apogee’s overall trends. And Large-Scale Optical will continue deliver -- solid results with potential upside coming from our engineered optics new market efforts. At the end of the day, Apogee is leveraging the current market strength and becoming better positioned to deliver outstanding results, no matter of the economic cycle. Karen, I would like to open up the call for questions at this time.

Thank you. [Operator Instructions] Our first question comes from the line of Chris Moore with CJS Securities. Please go ahead, sir.

Hey. Good morning. Maybe we could start on the glass side. Just, so I understand, so it looks like this quarter was aided by midsized project growth offset a little bit on the larger side. During the call in August, we talked about more competition coming in on the midsize glass from regional fabricators. So I’m just trying to kind of understand moving forward it sounded like there was a little bit of a change going on, because the lower euro was helping you on the larger side moving down. So maybe can you just talk a little bit about the glass kind of midsized versus large moving forward?

Yeah. Chris good observation. Yes. We have and we continued to grow our share of the midsized project market, which is equal and total value to the large project segments, where we had a smaller share of demand than we did in the large segment. So we’ve completely offset share loss in the large projects due to the import of glass from overseas over last few two years. We continue to achieve good margins, partly driven by our operational excellence programs at our Glass business and you can see that in our margin performance for the quarter. The great news, I mean, although, we had to take a significant GAAP adjustment to our books at Sotawall in the quarter, which was more than $2 million as you saw. The bigger picture is extremely favorable because that trend in the dollar, the weakening of the U.S. dollar, we are now seeing the earliest adopters of offshore glass coming back toward to our Glass business in a big way, excuse me, will not help us in FY18, but we anticipate where the current exchange rate is and even if it continues to move will bode extremely well for FY19 and beyond where we’re seeing customers award us work they hadn’t awarded us work for years. In the meantime, we’ll continue to push the mid-market segment. The margins are attractive. Excuse me, I got a bad cold, but margins are attractive and we’ll continue to address that margin mix through excellent operations performance like you saw on our results. So we’ve got a good model. There is also a substantial part of the market where we’re a very small player, the smaller projects and we believe this business has a great future.

Hey, Chris. Maybe just a couple of things is that, what might not have come to you as clearly a month ago when we updated our outlook was we continue to see nice growth in the midsized project sector, but with the increased competition was affecting our outlook at the time was our projection for growth of Architectural Glass and even in the midmarket sector, while we continue to see and expect growth, the rate of growth just kind of was impact a little bit. And then, as Joe talked about, just kind of from a product mix and so on perspective. As we continue to be successful penetrating further into their midsized and smaller project market, still attractive margins, but just in some cases less complex, just kind of less value added in nature.

Got it. Got it. Okay. That’s helpful. Maybe on the framing which is digging on the operating margin a little bit further, so it sounds like the -- I’d call the core business, without EFCO last year was better than 14%, sounds like it was as good if not better there, you had the $2.3 million on the Canadian loss. So I’m just -- I’m trying to kind of back out a number for EFCO operating margin for the quarter and it looks like it’s in that maybe in the 1% range, am I doing my math wrong or is it that low for this quarter?

Yeah. I mean if you are just looking at the quarter impact on the Framing Systems segment margins, the inclusion of EFCO is probably closer to 200 basis points.

Got it. Okay.

Thank you. And our next question comes from the line of Eric Stine with Craig Hallum.

Good morning, everyone.

Good morning, Eric.

Hey. Just wondering, given what’s going on with the Hurricane’s in Texas and Florida, any color you can give on impact that has to your business near-term and also long-term, and maybe just how that the margin profile of that business may compare to the current business?

Yeah. We do not and -- Eric, we don’t anticipate the impact of Harvey in Texas to impact our business this year. The situation in Florida is little bit more questionable, many of the project sites that were -- we have construction work going on in glass are still not back and unable to inform us about any delays. We think it’s pretty manageable. We did consider that in our forecast. So we’ve maintained our guidance. There may be some minor glass delivery push outs in Q3 into Q4, but we believe we can manage it through moving around other projects. So, right now, we’re keeping our eye on it. We believe it to be reasonably manageable for the second half of ‘18.

Okay. And I was actually thinking about it, as a potential, I guess, incremental modest positive. I mean from the Services business or given the retrofit new focus or I’m sorry not new but…

No, Eric. Eric, it’s a good question and many of have asked that. The reality of the matter is prior hurricane events that building coats have improved in both the Houston area and in the South Florida, most of the glass is survived the storms, it’s primarily a flooding issue on the main floors which on a construction site can make a mess. But once the -- you get the contractors back in and we’ll follow the steel and the cement guys right up the building. So we don’t anticipate significant business from broken glass so to speak and as the coats have already been quite stringent.

Okay.

And Eric, it is -- kind of short-term, in the smaller and midsized project area, more in our storm-related businesses, we’ve started to see some signs of little bit of activity to do some repair work and those types of things. But so there is may be some upside potential, that’s really too early to have any visibility. And then, obviously, as you know, we’ve been working hard to make sure we have a full range of hurricane resistant products. So depending on what happens longer term and as it relates to rebuilding, we’re better positioned to participate there.

Got it. Okay. Thanks for that. Maybe just turn into LSO, I appreciate the color on some of the engineered optics opportunities. But can you just talk about a little bit how you think about margins as you grow that business, you’ve kind of been in that $90 million revenue range, I mean, is there a -- if that business were to be $100 million plus, I mean, is there kind of margin threshold where you think you want to stay above as you balance that along with growth?

Yeah. Eric, we’re confident we’ll remain in the mid-20s operating margins in that business. The growth initiatives we have are in high margin profile segments. Certainly prepared to bring on incremental work at slightly lower margins, because it would be significantly accretive to Apogee, but I’m not predicting a significant downturn in the operating margins as we grow. We fully expect this business to break the $100 million barrier soon, but it’s not coming at low margin business. We’ll continue to have a great profile.

Got it. Okay. Good to hear. Last one, Joe, just an update, I know that you had taken over EFCO in light of what occurred there and I know that on the last call -- on the last update call, you talked about that you hope to have someone in place there permanently in the near-term, so maybe just an update on that process?

Yeah. We’re actively going through the selection process with -- to select a new President of that business in the meantime and I’d intentionally taken it slow. I -- my team, my direct leadership team and I are spending some time with that business. I think it’s good for me to get my hands around this business. It will be better for my future President that we’re more familiar with the business. We are fortunate that at Apogee, we have the horses in the stable to help that business. We’ve got glass people helping them with their glass fabrication. Our Harmon installation business is helping them with a couple of large projects that they took on that we in hindsight didn’t feel they were fully prepared to execute. So we brought in the cavalry, the team at EFCO was appreciative of that. I -- it will be at least a month or two month before I have a President in place. But we’ve got plenty of people helping run that business right now.

Okay. Thanks a lot.

Yeah. And I -- we made money in the quarter. The business is performing like we thought it would. So there are no surprises from the August guidance correction that we did following the things we did learn about the acquisition. Okay, Karen. Who is next?

Thank you. Our next question comes from the line of Sam Eisner with Goldman Sachs.

Yeah. Good morning, everyone. So just on the Services second half margin profile. I think, Jim you said that 5% was the full year. I believe that implies about 7.5% in the second half of the year. So help me understand what is actually occurring to allow that margin profile to significantly increase from roughly the -- arguably 1.5%, 2% that guys did in the first half of the year?

Yeah. Excuse me, it’s really a combination of the volume leverage in that business. The key leverage points are going to be the engineers and project managers, as well as we do some fabrication in that business as well. And then also, we kind of refer to it as project maturity. But because of the timing now we’ve had in terms of backlog and order activity, we have a number of projects that are kind of early in their phases and so the margin start to kind of flow a little bit more stronger as the project moves forward, so the combination of the volume leverage and the visibility of margin that we see in the backlog in the anticipated flow of that work.

And for those projects that, I mean, this as a percentage of completion accounting business, so are you already starting to record cost for that in the first 20 days of the quarter or is that something that you guys anticipate to occur in the next six days?

Oh! No. It’s -- I mean, I think, pretty all the projects have begun. They’re just at kind of their early phases where maybe the work is more in the shop rather than on the job site.

Got it. And then, maybe transitioning over to the Framing segment, obviously, the transformation underway. Historically, I believe that that segment’s profitability has been pretty heavily correlated with movements in aluminum prices. So help me understand, there has been a pretty significant uptick in aluminum prices, how you’re managing the raw material situation and how we could think about the medium-term margin profile, given where aluminum prices are today?

Yeah. Sam, Joe here. For the aluminum -- for the larger projects that we do within that operating segment we forward buy aluminum when we win the project. The smaller businesses that are on a book and bill five-day order-to-delivery book and bill primarily our store front businesses, which should be Tubelite and Alumicor. We’ve been much more aggressive on raising prices literally within weeks of an aluminum movement. So we’ve had very, very small impact on aluminum cost. This is completely different than the historical process used by Apogee and our industry, and we are not the only ones moving faster, our competitors are doing the same thing. So I’m confident there’s new leaders in place in our industry and in our business that moved the prices of the final product along with the aluminum. So you didn’t hear us mention it too significantly today. We’re covering the cost increases. But the bulk of our aluminum buy is for our long lead-time businesses, Sam, where we buy as soon as we win the award and we’re locked in.

Got it. And then just maybe going back to the LSO question from the prior questions, I think, that you guys in your most recent 10-Q added something regarding increased competition with LSO. I believe there is certain competitors that are now being able to make some products that now compete with you guys but before there wasn’t a player. So help me understand the competitive dynamics and why we shouldn’t be worried that the margin profile is potential at risk?

Yeah. We’ve had in -- we’ve had an international competitor in this space ever since I’ve been here in the company. We continue to do extremely well against them. We have done well ourselves in Europe, our relationship with our customers, our short logistics supply chain is paramount of our quality. Our product offering we believe is unparallel. I -- is confident in this business as I’ve been ever since I arrived here and we have -- we are in very good competitive position to continue this gem of a business.

And just a one kind of comment is that part of that inclusion is some of our growth is coming at areas where we haven’t been strong such as international custom picture framing and this engineered optic sector, where that competition has had more of a presence. So to some degree that comment relates to that we’re entering more into the competitive landscape.

And I think our competitors have to worry about our growth in this segment.

Got it. That’s helpful. I will hop back in queue guys. Thanks so much.

Thank you, Sam.

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

Good morning, Joe and Jim.

Hi, Jon.

Just going back to the hurricane question, we heard some reports yesterday that new home construction might suffer little bit as workers move from new home construction down to the -- down to Florida and Houston, where there might be steady work and for an extended period of time. Could there be any impact on, let’s say, the commercial side, workers moving from, let’s say, the Midwest or East Coast or whatever down to Florida, Houston where there might be some work and result in some project delays in non-affected areas, is there any thought on that?

If anything, I think, there is an opportunity that some of the workers moving to the non-resi segment or into the multi-family housing, which is part of our segment profile. The reality of the matter is you don’t hear Jim and I highlighting worker availability at project sites as a reason for revenue delays into the second half. But the reality matter is, our contractors are full right now and this is very much like we experienced in 2015, when the construction sites were really busy and the advancement of existing projects are behind schedule and it’s kind of delaying the delivery of goods and services to the construction site. We’ve seen that in glass. There is nothing wrong. In fact it’s -- we’re a victim of such a strong end market that the steel and concrete guys aren’t as high up the building as they were anticipated to be when the contractor release the schedule to us and hence we maybe on the 30th floor instead of 40th floor, it put some pressure on our glass deliveries and in our installation business. Any additional workers coming into this fold would be a positive trend in non-resi construction.

Okay. Okay. Then, secondly, going back to EFCO, one of the headwinds was incoming order rates, have you seen incoming order rates return to a more normal level and from the decline that we have seen early on?

Yeah. I’ve met with the entire sales organization of EFCO and our sales counsel, and we’re beginning to see really good improvement in our order patterns, something Jim and I look at literally every day and trend has been very good. So I’m confident. I know the listen if you ever in part of the company that’s gone through a sale process, it’s distracting the sales organization doesn’t know where the company is going to end up. I am absolutely, I believe speaking for all my EFCO colleagues 100% delighted that they ended up as part of Apogee was the best place for this company to land. But they didn’t know that from October of last year until till June when the sale was announced. That distraction took its toll, we certainly we are aware of that, I think it took a greater tool then we had realized in our due diligence and that led to a couple of surprises for us. The team now realizes we are the real deal. We’re here to stay. They’re here to stay. We’re adding all the investments and the resources to that business. So, yes, we’re seeing a rebound in orders and I am pleased that the business is positioned very much like our core existing businesses or in Framing Systems, when I came to the company six years ago and it’s a mirror image of what we dealt with in our businesses here. I’m absolutely confident we’ll blow past the double-digit operating margins in that business.

Okay. Hey, Joe. Thank you very much.

Yeah. Thanks, Jon.

Thank you. And our next question comes from the line of Julio Romero with Sidoti & Company.

Hey. Good morning, everyone.

Hey, Julio.

So, just touching on the Framing segment, just hoping for some additional color on, which of the individual businesses are driving that 17% organic growth and also the margin profile, the $24 million in organic backlog growth in the Framing segment?

Yeah. All of our businesses that existed last year that when our baseline, our window, excuse me, our window wall business, our storefront entrance businesses and our finishing businesses grew 17% organically year-over-year and the backlog has increased across those businesses as well. They all performed extremely well with operating margins in the mid-teens or better and we see -- and that included the usual hiccups you have in any business in any given quarter. I think our second half will be even stronger in those core businesses, and obviously, we’ll continue to work our issues around the acquired businesses to get them increase margins as well.

And backlog in the Framing Systems segment is primarily associated with the larger project portions of the business in terms of the existing business backlog and the growth that we saw is at attractive margins.

And two of those businesses are now based in Canada, our storefront and entrance business, which we acquired four years ago called Alumicor. They are poised. We’ve had a substantial increase in orders in that business. So they are poised for a very strong second half. We are starting to see good recovery in the commercial construction market in Ontario in particular and our Canadian business we acquired last December, as you know Sotawall, which was primarily a U.S. Northeast U.S.-based revenue business is seeing substantial bidding activity. And I believe as we look forward, we’ll see a substantially larger piece of their revenue profile be in the Ontario market, where we’re starting to see a tremendous recovery in Toronto where building vacancy rate is approaching zero and construction boom on tall office buildings is now inevitable.

Got it. Appreciate the color there. And just to that point, Jim, you mentioned earlier that you see flat organic growth for the full year of fiscal ‘18, is that kind of reliant on maintaining this 17% or so organic growth right in Framing or are you kind of counting on a better second half in maybe the Services segment to get to you to flat organic for the year?

Well, yeah, the answer is, yes, to both of those. I mean, we continue to see the strong double-digit growth in the Framing Systems segment and then we do -- we had come into this year knowing that second half for Architectural Services is stronger than the first half.

Understood. And just, lastly, does this quarter mark the end of transaction cost for the two prior deals or there is some lingering cost in 3Q and beyond?

Yeah. There is some kind of nominal lingering cost. I mean, we might see a little bit, but it’s pretty nominal.

Got it. Thank you very much.

Thanks, Julio.

Thank you. And that concludes our question-and-answer session. I’d like to turn the floor back over to Apogee for any closing comments.

Okay, Karen. Thank you, team. Thank you for listening to our story today. You’ve seen we’ve held our guidance for the year. Jim and I feel very confident in our businesses as they stand today, feel we’re going to have a very strong second half based on our work in hand and if you look at our approximately $900 million in backlog, we feel good about fiscal ‘19 as well. We’ll be talking with many of you throughout the day and over the next few days. We’ll look forward to those dialogs. Thank you. Have a great day everybody.

Ladies and gentlemen, thank you for your participation in today’s conference. This does conclude the program and you may now disconnect. Everyone have a great day.