Good day ladies and gentlemen, and welcome to the Apogee Enterprises Fiscal 2019 First Quarter 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 may be recorded. I would now like to introduce your host for today's conference, Ms. Carrie Schweyen. Ma'am, you may begin.

Thank you, Daniel. Good morning and welcome to the Apogee Enterprises fiscal 2019 first quarter conference call on Thursday, June 28, 2018. I would like to begin by reminding everyone that there is slide to accompany today's remarks which are available online. To access them simply go to the Apogee Investor Relations Web site at ir.apog.com click on the link to this webcast under upcoming events. With us on the call today are Joe Puishys, CEO and Jim Porter, CFO. Their remarks will focus on our fiscal 2019 first quarter results and our outlook to the full fiscal year. Once they conclude, they will take questions. Turning to Slide 2, during the call and on the accompanying slides, 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 acquisition 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 Apogee's business and financial results can be found in our SEC filings. Turning to Slide 3, and I will now pass the call over to Joe.

Okay. Thanks, Carrie, and good morning everyone. Apogee delivered a solid start to fiscal 2019 in the first quarter and I'm very proud that our teams drove operational excellence and growth across the company and we delivered on our strategy to create long-term shareholder value. Revenues were up substantially and backlog continued to grow across all of the businesses which should support growth throughout the rest of this year into fiscal 2020 and fiscal 2021. We saw ongoing productivity gains, operational improvements and tight financial management including excellent cash conversion. Based on these results and a strong outlook, we've raised our outlook for the full year guidance by $0.05 per share as well as our margin goals and reaffirmed our expectation of 10% top-line growth. Before diving into the progress of the first quarter, I'd like to provide some background on the progress we've made over the past seven years building a stronger more diversified Apogee. If you look at Slide 4 from our investor deck, it shows from fiscal 2011 to fiscal 2018, we delivered consistent year-over-year revenue growth every year in spite of the variability of our end markets. This highlights the strength of our diversification. The chart also illustrates how we successfully transform the business following our strategic decision to drive outsized growth in the framing systems business where we enjoy a strong competitive position and high margins and this did not come at the expense of our other segments. A key driver of growth across each of these segments has been our successful efforts to increase penetration and share extending into new geographies and new market sectors and to launch new products. Underlying revenue growth you'll see on this chart. We've successfully grown our backlogs, our profits and our pipelines across each of the businesses to…

Thanks Joe, and good morning. I'll cover the first quarter results and the outlook. Turning to Slide 9, for our consolidated first quarter results as Joe as described we are pleased with solid results for the first quarter. Consolidated revenues were up 24% over the prior year period driven by acquisition related and organic growth in architectural Framing Systems and growth in architectural services as well as in large scale optical. This was partly offset by an expected timing related decline in Architectural Glass. As anticipated on an organic basis excluding the EFCO acquisition revenues were comparable year-over-year. Gross margins were 24% in the first quarter versus 25.8% a year ago through the inclusion of the currently lower margin EFCO business and deleveraging in Architectural Glass and Sotawall. Our SG&A increased to 17.5% of sales from 17% in the prior year period largely with the inclusion of EFCO, but also the higher overall selling expense. Operating income declined to $22 million as a result of lower timing related sales and operating leverage in Architectural Glass partly offset by good results from architectural services. Adjusted operating income was $24.9 million. In the current year adjustments are only adjusting for amortization on short lived acquired backlog at Sotawall and EFCO. Interest expense of $1.9 million compared to $400,000 in the prior year period due to debt used for acquisition. Offsetting the interest expense impact on earnings with a lower tax rate at 24.1%compared to 32.9% a year ago reflecting benefits from the Tax Cuts and Jobs Act. Earnings per share were $0.54 versus $0.56 in the prior year period. Adjusted earnings per share were $0.62 even with the prior year period. Turning out to segment results, which is on Slide 10, in Framings Systems revenues were up 62% from a year ago…

All right. Thanks Jim. Hey I want to remind everyone that our visibility which is critical to our forecast here goes well beyond our nearly $1 billion in book backlog. It also includes awards that are not yet in backlog. It includes commitments and wins, bidding activity and architectural calls. All of these indicators continue to be very positive in supporting outlook for at least two plus years of end market growth. Industry fundamentals also remain encouraging. We're seeing favorable lending in the non-resi construction market, office vacancy rates remain stable and relatively low and job growth continues in the office occupying sectors education healthcare and hospitality, which are all vitally important to Apogee. Furthermore, the Architectural Billing Index continues to reflect solid growth in all U.S. regions and sectors in particular the office and institutional building segments both of which are core markets for Apogee. As we reported in this first quarter press release and earnings call this morning, fiscal 2019 is off to a very strong start sustaining last year's momentum. I'm proud that our teams drove operational excellence and growth across the company and we delivered on our strategy to create long-term shareholder value. Revenues were up substantially quarter activity was strong, the backlog continue to grow across the businesses and the outlook for North American construction industry is robust. All these factors should support growth throughout the rest of this year in the fiscal 2020 and beyond. And with that, I'd like to ask you Daniel, our operator to open the call up for questions. Thank you.

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

Hey, good morning guys.

Good morning, Chris.

Good morning. Maybe just walk through the kind of the EFCO -- expected EFCO margin progression from a high level in terms of when will most of the kind of mispriced pipeline run-off and do you expect for example will there be a big bump in EFCO margins in the late '19 some time in '20 just kind of a little bit more detail on that if you could?

Yes, Chris. I will start and Jim will give you more detail on the numbers. In general, we had a couple of projects that were particularly troublesome one of which is virtually complete. And the second one is exiting the engineering stage and we now go into full scale production. So I feel good about both these projects believe, we are substantially completed through the hurdles and the work we've been bidding on has been core to the company. So I would say for the most part, the problematic projects are behind us. As I mentioned, we had a little bit better than breakeven business. I'll let Jim comment on the progression for the year, but it's upwards opportunity for us for sure.

Yes. I mean for the current fiscal year, I think we had given some messages at first half of the year it will be a little bit negative, the second half of the year a little positive roughly breakeven for the year. Our first quarter was slightly better than we expected not much but we still expect kind of the first half to be breakeven to slightly negative and the second half slightly positive and roughly breakeven for the year, but that trajectory of improving the margins as we work through the better work and start to see the impact of the operational initiatives.

Got it. That's very helpful. On the glass side, it sounds like some of the bigger buildings you're seeing a pickup in later on in fiscal '19. Do you -- from what you see is that going to continue into fiscal '20?

I believe so we still have a substantial share of large projects, I don't ever imply anything else we did get down from our traditional high share of demand. We began to see -- the customers have realized there are a lot of hidden costs when you deal with a long logistics supply chain for large heavy glass. We started to see some offshore fatigue set in and many of the customers that hadn't bought glass from us as they chanced international sources. Thanks to the exchange rate and the strength of the dollar have begun to come back and we've seen this trend. I think it's just beginning I expect to continue and our glass people are feeling pretty comfortable seeing some share recovery in that segment. And the answer is yes. I see it continuing into F'20 and beyond.

Got it. Okay. Last question for me. Joe you talked a little bit on the specifics behind the CapEx, so that 60 to 65 for fiscal '19 that's going to be split between framing and glass. You talked a little bit more being spent on framing perhaps and historically.

Yes. It's across all the businesses; the framing systems will be a little higher than it has been because of our investments in productivity. We -- this project I refer to it EFCO to improve their factory was something we identified even prior to the acquisition. And frankly, EFCO had been pushing their prior parent to make this investment it wasn't happening that spend is just begun and will continue into about April of next year when we go live with the new factory layout. So Framing Systems will be up a little bit more than normal and glass will be more of a traditional spend.

Got it. Appreciate. Thanks guys.

Okay. Thanks Chris.

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

Thanks. Good morning. Great quarter.

Hey, Brent.

Good morning.

Obviously, you'd a great backlog coming in with services in the first quarter, but still very surprised the margin performance there. Joe is there any particular unique projects associated with that. And I guess historically you could kind of tend to build up this first quarter in terms of margins for that segment. Should that still be the expectation?

Yes. There's nothing unique about a particular project or a one-off that drove up margins. Listen, no denying it was an easy comp, right? We got beat up last year because of the revenue hole that was created in the order pattern from the prior year. So I certainly admit that we had a relatively easy comp, but the business has been focused on data analytics driving to better project selection. No surprises in the field and in our factories and I expect that the trend to continue improve in the services segment going forward.

And Brent, just a comment, I mean the services segment -- just a quarter-to-quarter timing in that business is really purely a function of the projects that we're serving in. So I understand your point. Probably the last multiple years, we've seen the back end of the year really being the strongest both in revenue and the corresponding margin. This year, again, based on the timing, the work is a little bit more front-end loaded. And so the drivers in margin in that business are the combination of volume leverage that we get, the execution on those specific projects, but also the mix of the projects that happened to be flowing through in any one quarters. So Q1 was pretty nice based on all those factors for the business.

Okay. Thanks for that. And then, I guess back on the glass business, I mean obviously that sounds like the large project stuff is coming back nicely for you and portion of that being recapturing some share. Joe I guess what's your kind of outlook for that particular sector of the market its core, I mean how far out can you see jobs and is it a kind of mid-single digit growth sector within the non-res market, is it faster or slower than that. Any thoughts on that?

There's no question the activity is robust. The bidding, the awards, the architectural activity as I noted I think mid-single digit is the natural place that I would peg the end market. And we talk about F'20 and F'21, we don't see any indicators, I mean you can look at Dodge data, McGraw-Hill. They all project at some point a flattening but no sharp decline. We see -- there's no indication of any downturn in this modest growth in the glass segment. And so as far out as we can see, we see growth, we are doing things to gain share such as our penetration in the mid-market. We've got other strategies that I won't get into on the call that we believe the future of that business is robust. It's a core part of our portfolio and will be. We talk about Framing Systems because of our -- the outsized growth there, but it is not coming at the expense of glass which will continue to grow and improve its profits. There was -- we weren't the only player in this industry that had a lull. I use word jiggling in place last year. There were -- because some of the election hangover, worry about tax legislation, worry about trade and tariffs. There was a lot of activity just sitting on hole in the second half of last year and it was frustrating because the work was out there and a lot of the people in our industry we were all at AIA conference last week in New York. A lot of our industry saw the slowdown in Q1, but very nice pickup in orders. I mentioned the glass orders were up substantial. We don't generally rely on backlog in that business because of our quick turn from order to delivery but that backlog was up nicely in the quarter. And the awards were a higher margin than our award a year ago for our average margins that we revenue last year. So the business is in very good position. Came off its tough quarter, it's exactly what we guided that we'd be down 20%. We had good visibility and we didn't surprise, it's a tough optic, but Q2 as I mentioned and Jim mentioned we'll see a nice improvement in the revenues over Q1 and Q3 and Q4 will show a nice year-over-year growth but based on our current quarter forecast.

That's great. And then, last one if I could, just -- it sounds like the order book is getting better at the Sotawall business. What are the particulars driving that?

Yes. So we knew the risk of that acquisition was heavy reliance on orders primarily in the Northeast New York and Boston. We really didn't see any wins in New York City throughout the entire fiscal year last year similar to that kind of issue I talked about in the glass. We started to see a release of work. We won. We got some nice awards. The backlog -- the Sotawall backlog grew more than any other business in Apogee in the quarter due to these wins. Unfortunately, it really doesn't start to kick in on the revenue to late in this fiscal year. And it bodes very well for fiscal '20. I think fiscal '20 is going to have comps over fiscal '19 kind of like you're seeing in services this year. And we've seen some -- we've gotten some wins in Canada as well. So we're not totally reliant on the northeast for that business. So it's been a great business, it just is -- it just dealt with the lower New York for the whole last year which we're feeling on revenues now, but we can absorb that within our Framing Systems performance.

Okay, great. Thank you.

You bet.

Thank you. And our next question comes from Eric Stine with Craig-Hallum. Your line is now open.

Hi, Joe and Jim.

Hey, Eric.

Good morning.

Maybe just focused on framing. I guess related to tariffs and I know you don't necessarily need to ask for a prediction on where all of that ends up since there are a lot of moving parts, but maybe just you've had good ability to pass on those costs to your customers. However, in the past there has been just some concern with the rest of the market act rationally. So maybe just talk about your ability to still do that, but also what you're seeing in the market?

Yes. You did not hear us call out input cost as an issue for us. We have across our business has been able to offset quite frankly a -- moving target. The London Metal Exchange on aluminum added largest single day drop, the same day that the tariffs and the decision around the Russian oligarch now it's resolved. And so you don't expect that. There's been ups and downs. It has definitely been headwinds, but we were able to offset it with price. I would say the market has -- competition has been generally rational. So far so good. It remains a risk, but no more so than the risk it was six months ago. As you said who knows what's going to happen next in this game of potential trade wars. We have also seen headwinds in transportation costs and in lumber. And we use a lot of lumber. Many of you have been in our factories. We use a lot of lumber for shipping our product. Again, we've been able to offset these with pricing. So inflationary pressures on U.S. are always a risk to future expansion, but so far Eric it's pretty much been held in check. And I think part of that is because it is such a moving target. People are a little bit more patient I guess right now with what -term implications would be -- tariffs and trade wars might mean.

Okay, good. Thanks for that. Good color. Maybe just turning to retrofit and thanks for the details there I think the 50 million bookings that you're targeting this year. I know going back ways you had $100 million go for that business. So just curious, is that still kind of the way you think about this and how many…

Absolutely. No question, it is a longer lead time than the retrofit world I grew up in and Honeywell with HVAC and lighting controls. But it's real, we're winning a lot of business. We've doubled the team. It's a relatively low overhead effort where we've got a sales team and engineering -- energy engineers in this business. It's a small team that we continue to add to. And this is the one place where we kind of approach the market as Apogee. We typically don't do the installation on these projects. What we pull through our glass, our metals, our Wausau windows, our Linetec finishing or and it is a wonderful business because it is the one place where we can kind of go as a bundled package. We can offer a solution to a building owner or a school or a municipality because we know the exact cause of making the glass, or building the windows of installing them. And we have the energy and we do free energy modeling for our customers so that they can see what the returns are. So yes, this will continue on its trajectory to $100 million and beyond as I had gold when I put this together about 45 years ago now.

Eric, the additions that we've made to the team actually a couple of them are just actually starting in the month of July. So there's a slow build for these activities but good momentum and we're excited about accelerating it.

Okay. Got it. Maybe last one for me and I might have missed this in the prepared remarks, but can you just give the backlog breakdown between sectors as you typically do.

Yes. We report the backlog for our Framing Systems segment and our tech services. So for Architectural Framing Systems the backlog was $427 million.

No. I mean by sector to office institutional.

Yes. Actually, I didn't [raise] [ph] this quarter. Office is between 40% and 45%. Institutional is about 15% multifamily is kind of in the 30%, 35%. And then, hotel transportation and everything else is 5% to 10%.

Okay. Thanks a lot.

Thanks Eric.

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

Good morning Joe, Jim.

Hey, Jon.

Good morning.

Joe, we've been reading reports I think in the month of May construction costs in aggregate were up 8%. And I guess my question to you is Joe, is there a point where you become a little bit concerned or are a little bit nervous about the outlook ahead as these construction costs rise or if the 8% is sustained for a period of time? Is there or is there may be sort of a breaking point that that might be a tipping point in terms of activity levels.

Well, there's always a tipping point and a breaking point as you say. We're not seeing it. I would tell you, I'd be more concerned about these the inflationary cost issues right now. If we were in an up cycle like the country was 10 years ago buildings were going up on spec. And there is more of an elastic relationship to the inflationary cost in that environment without hitting. Buildings are going up now because the underlying demand is calling for the office space that should withstand these inflationary pressures in my opinion and experience. Again, I can't tell you what the breaking point is, of course, at some point, if a building gets too expensive its steel costs skyrocket. But fundamentally offsetting that risk is the underlying demand for office space. And frankly improved office space, the biggest issue employers face today, we didn't talk about on this call. Hiring workers we generally do well at the construction site our installation business. We are a national signatories to the ironworkers and lasers, we get the people we need. We're a great employer where we have bigger issues of getting our back getting factory workers. It's a challenge for that full employment. That's probably the bigger issue most of us have this day and getting people even in the office environment to come work for you. The younger generation they want offices with large window views, clean views and that is a trend towards more glass and better window to wall ratio in buildings. It drives companies that retrofit not just for energy but aesthetics. And I think those things offset some of these inflationary concerns that you raised.

Okay. Thank you. Jim a question back to the EFCO margins, in the quarter it was breakeven if you wouldn't net out or exclude the larger problem projects, if you would throw those out. What type of margins is, would EFCO be operating at?

Sorry, Jon, can you hear me?

Yes. I can hear you. Yes.

Okay. Sorry about that. So excluding that work we're at today is maybe 2 points of margin. But where we have a little challenge with that is that we're still dealing with how those projects are carrying over and impacting the core business. But, it's working there. Today at the beginning stages of those -- of our core business. We probably would be back in that 2% to 3%.

Okay. All right. Thank you very much.

Thanks Jon. So Daniel, we've got time for one more question. I'd like to tell you if we couldn't get to your question this morning, we will certainly follow up with you directly and take care of your questions. So one more. Whoever's on next Daniel?

Thank you. And our last question will come from Bill Dezellem with Tieton Capital Management. Your line is now open.

Thank you. You had mentioned qualitatively, the glass -- architectural glass revenue from your backlog was up nicely from a year ago. Would you be able to quantify that in some dollar terms for us?

Bill I was referring to the -- normally when I'm talking about backlog although we provide a year-over-year comp, backlog is the one metric that's more important to talk about sequentially and I was referring to Q1 increase in backlog, which gave me the confidence that Q2 revenues would be substantially higher. I said double digits for the mid teens percentage increase in revenue Q2 over Q1 thanks to a backlog increase in that business. Remember the backlog. This is a business that turns its backlog in less than 90 days. If we're in a slow period, we have lead times of two to four weeks when we're busy it's 10 to 12 weeks. We're busy right now. So that turns in and out in just 90 days. So year-over-year comp backlog in glass is not a metric we put a lot of measure -- a lot of stake on. Frankly, it's a metric of how the orders work for the last two to 12 weeks depending on how busy we are. It's more the trend I'm concerned about and it's been very, very favorable for the last the whole quarter. The bigger problem we had in glass was trying to hire enough people to make the product that we'll be shipping for the rest of the year.

And Bill as we talked about because of that quick turn in backlog, we generally talk about qualitatively architectural glass in terms of our commitments or awards as well as our backlog because we have visibility in terms of that work much greater than what specifically in the backlog and that that trend has been positive both year-over-year.

So, Bill I use the word substantially all of fiscal '19s revenues for glass or in hand. Only a fraction of that is actually in the backlog. The rest is in the category awards and wins. It's good as gold, but the customer won't literally give us the purchase order until 8 to 12 weeks before they want the product. And so we know when that is we have the production schedules reserved for them. And so 90% -- close to 95% of our year is already in hand, in glass. And if you compare that metric to one year ago, we had about 75% of our year in hand. So that's why we feel much more robust about our forecasting in glass this year.

That's quite helpful. Thank you. And then, the last question I'd like to have you address is relative to your progress in the mid high market. Could you talk in some detail about your successes and activity there? It was just a quick bullet point I believe in one of the slides in your opening remarks?

Yes. In our history -- our history has traditionally been relying on large projects in glass. I've often stated that as a company we are way too vulnerable to that. What is in fact the lumpiest piece of non-resi construction for commercial towers, they have the highest peaks and the lowest valleys that was more than two-thirds of our glass business -- and glass was more than half of Apogee when I arrived. That chart I showed the area chart shows we're far less depending on glass as a company although we love the business. And within that now we're more like half and half small and medium projects. We move downstream in the medium project just the margin profiles are the same if not better. But you have to be able to deliver in more consistent and reliable lead times. And we were only able to do that because of the processes and the automation investments we've made in our glass segment and the people we put in place that had allowed us to consistently meet the shorter lead times demanded in the mid-segment. And we continue to make those improvements. So we're capable of continuing our journey to grow share in that segment and we are under represented in the smaller projects in the mid segment and the small market itself. So I'm confident that those investments we've made will allow us to continue to do well in this segment within glass.

So, if you can -- please go ahead.

Yes, Bill. We're almost out of time here. I'd like to just suggest that Jim and I and Carrie can follow up with you. I don't want to cut anyone off I know there's a couple more that are in the queue and I'm sorry. We'll be taking calls for the next 48 hours and beyond. And I just want to -- Bill, sorry, I'm going to have to cut you off and thank you. It was great to see you here recently. And again, I'd like to thank everyone. I hope you realize we're off to a great start. Hope you heard our message well today and I'll look forward to follow-up calls with some of you on this phone call. Have a great day and look forward to reporting more success in Q2 in 90 days. Thank you.

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