Good day, ladies and gentlemen, and welcome to the First Quarter 2020 Apogee Enterprises, Inc. Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we’ll conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions] It is now my pleasure to turn the call over to Jeff Huebschen. Please go ahead, sir.

Thank you, Andrew. Good morning, and welcome to Apogee Enterprises fiscal 2020 first quarter earnings call. With me today are Joe Puishys, Apogee's Chief Executive Officer; and Jim Porter, Chief Financial Officer. I'd like to remind everyone that there are slides to accompany today's remarks, which are available in the Investor Relations section of Apogee's website. During this call, we will reference certain non-GAAP financial measures. Definitions of these non-GAAP measures and a reconciliation to the nearest GAAP measures is provided in the earnings release we issued this morning, and that's also available on our website. Also, I'd like to remind everyone that our call will contain forward-looking statements reflecting management's expectations, which are 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. And with that, I'll turn the call over to you, Joe.

All right. Thanks, Jeff. Good morning, everyone. Thanks for joining our call today. The first quarter was a solid start for our fiscal year. We hit on our commitments. Backlog is up. We're holding guidance, and we're progressing on strategic initiatives while launching new ones, which we'll touch on today. And finally, we're pursuing cost recovery on the charges from the prior quarter. We still have a lot of work ahead of us but our progress is excellent. This morning, I'd like to share some perspectives on what we are seeing in the end markets and discuss the highlights from the quarter and progress in some of our key strategic initiatives. And then of course, I'll turn it over to Jim for more specific details on the quarter and our full year guidance. First, the economy and the market conditions. Let me start with some observations about the economy and the end markets we play in. I continue to describe the overall market condition in our sector as bumping along the top, the healthy environment in which Apogee can continue to grow. Underlying economic conditions remain stable. While economic growth has slowed a bit, the U.S. still averaged over 150,000 new jobs per month over the past quarter. And we continue to see employment gain in the office occupying sectors, education and health care, the most important market segments for Apogee. Looking specifically at commercial office market, office vacancy rates are at decade low levels and rents are moving higher, both of which point to continued demand for new office construction. Demand for multifamily housing also remains strong with new unit construction forecasted to remain at historically high levels in 2019. Additionally, the recent downward trend in interest rates should be supportive for new building products - projects, I'm sorry.…

Thanks, Joe. Good morning, everyone. I'll begin with our consolidated results, which you can see on Page 5 of our earnings presentation. Total revenue grew 6% to $355 million compared to $337 million in last year's first quarter, primarily driven by the significant growth in Architectural Glass. Operating margin of 6.5% was in line with last year but down from adjusted operating margin of 7.4% in last year's first quarter. As a reminder, adjusted results in the first quarter of fiscal 2019 primarily excluded the amortization of short-lived acquired intangibles. These intangible assets have now been fully amortized so there is no similar adjustment in the current fiscal year. EBITDA came in at $34.1 million compared to $35.5 million of adjusted EBITDA in last year's first quarter. Interest expense increased to $2.6 million from $1.8 million in last year's quarter and higher debt level. And the tax rate of 24.4% was in line with our fiscal 2020 guidance of approximately 21.5%. Putting it all together, earnings per share were $0.58 compared to $0.54 in last year's first quarter with $0.60 last year on an adjusted basis. Now I'll cover the segment results, which are on Slide 6. Framing Systems revenue was $181 million, up slightly from last year's $179 million. Operating income was $12.3 million with an operating margin of 6.8% compared to 6.9% last year and adjusted operating margin of 8.5% in last year's first quarter. The lower margin was primarily due to less favorable project mix as we expected coming into the year, as well as some lower volume leverage in a couple of locations. Framing Systems' backlog of $407 million held near historically high levels. The Architectural Glass segment has strong year-over-year improvement as the segment continues to progress past the work force and productivity issues that…

All right. Thank you, Jim. But to wrap up, this was a nice start to our fiscal year. We're making good progress in a number of areas that should position us for further top line growth, improved margins and stronger earnings and cash flow with the remainder of the year. Looking longer term healthy market conditions, our backlog and our pipeline of operational improvement initiatives set us up for continued revenue growth in margin expansion in fiscal '21. I'd like to end where I started that being the end markets. There's a lot going on in the world and there are many geopolitical worries today. But there are many things going very well in our economy unprecedented low unemployment, strong business confidence, still very low inflation and very favorable interest rates. There are a lot of things going right in our end markets. We feel good about it, but if you heard today, we're putting a substantial laser focus on cost and cost actions at Apogee. So with that, I thank you for you listening to me today. And I'd like to ask Andrew, our operator to open the call up for questions. Andrew?

Certainly. [Operator Instructions] All right. Our first question comes from the line of Chris Moore with CJS Securities. Your line is now open.

Thank you. Good morning, guys.

Hey, Chris.

Good morning. Maybe we'd just start with Framing. Obviously, most of the conversations is around EFCO. Can we just maybe talk a little bit about core Framing business? How the margins are looking there?

Sure. Chris, this is Jim. I'll talk about it. I mean, we continue to see good performance across our Framing Systems businesses. And we have some timing quarter-to-quarter but overall, our core businesses are continuing to perform well.

And the - maybe you could just repeat what you said earlier, the 100 basis point impact in Q2 Framing is related to EFCO or can you just go over that again quickly?

Yeah. No, so really - what we're really trying to step up starting in the second quarter is a real increase in some of our supply chain and purchasing opportunities across a number of Our Framing Systems businesses, which is really looking at how we both optimize our supply chain from extrusions and finishing, as well as do some in-sourcing we've been - frankly through some of our productivity initiatives, we increased some capacity that's enabling us to do some in-sourcing where we’ve been purchasing some extrusion and finishing services on the outside we’ll be able to some of that in-house. As well as we're launching on an expanded effort to drive procurement savings really across the company, which is concentrated within our Framing Systems segment. So a lot of activity we've been working on number of these initiatives, but we're really putting our foot on the gas in the second quarter to get these going, and there is just some initial cost to get them in place.

Got it. That's helpful. And just in terms of the glass market. Can you talk maybe a little bit further about what you're seeing kind of large building versus midsize? And where the growth is coming from? What are you seeing these days?

This is Joe, Chris, I'll take this one. We're seeing consistent end markets, the term I continue to use and has been take - I stole from somebody many years ago and somebody stole from me recently is that we're bumping along the top. And we're seeing good bidding and projects advancing in office, health care, education. I would say no one sector - in multifamily housing, no one sub-sectors really stand out or laggard. It's healthy. The construction sites are full. So we tend to have these ebbs and flows that are often driven by the perhaps over-subscription of work at the construction side. So you’ll have a couple of quarters where maybe projects don’t enter the contract or the backlog as fast as you thought. But right now, I would say there's probably more work trying to manage the schedules then there is concern about the end markets. So it's consistent across the sub-segments, frankly, and across the U.S.

Got it. Helpful. Last question for me, just in terms of new glass initiatives, anything else that you can say on that at this point?

No. I - not really. And I'm sorry for that. We're just stuck to the financial impact for now. The project is progressing. I expect revenues to begin - will be - certainly begin in the second half of the year. The - I think by the time we report on our second quarter earnings we will actually be in production and we’ll probably be able to talk about it a little bit more in 90 days. But nothing is - everything has progressed as according to our plan when we announced it to you all 90 days or whatever it was 65 days ago.

All right. Appreciate it. Let me jump back in line.

Thanks, Chris.

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

Good morning, everyone.

Good morning, Eric.

I just want to start with Glass, obviously, a very good quarter. I mean is this something where we should view a lot of the hiring challenges and some of the operational things as being in the past that you've turned the corner there? Or are there still some things in progress and if there are maybe an update on where all that stands?

Yeah. Thanks. Eric, it's an ongoing process. We had definitely made good progress. We have enough people in place to run the businesses effectively. We'd like to add more. We could remove some overtime and improve our margins a little bit. The issue we had a year ago was we just couldn't keep up with production demand. Now we're able to keep up with demand. Still a little bit of cost opportunity, the labor markets remain tight. It's a challenge to hire new people and particularly in the region where our largest factory is. But we have the people to get the production out. We have a little more opportunity and they continue to make progress every quarter. And the first quarter was a bit of a transition. We don't hear us complaining about weather again. But it was a challenging weather environment even in our fiscal first quarter here. Remember our year started in March. March and April were brutal out here. So throughout the quarter, we improved productivity at our Glass business. May was the best month of the quarter. And we come out strong in June operationally. So again, I'll end where I started, it's an ongoing process. We've got enough people. We'd like to have a few more and we continue to do some creative things to find talent.

Got it. Okay. That is helpful. And maybe just to follow-up on the previous question. I mean, I'm not going to ask details necessarily about the new Glass initiatives. But I mean anyway you can maybe frame in fiscal '21 you expect that to, I believe, Jim said a contributor and potentially a significant contributor. So anyway you can kind of frame the magnitude of that from a high level? And then is there anything different about that initiative that would change kind of your long-term operating margin outlook for that segment, which I know you shoot for 10% plus.

Yes. Eric, yes, I'm sorry, I'll have to be a little bit careful. I don't want to start providing guidance for fiscal '21. Jim and I will be doing that obviously, at some point and later in this fiscal year. This project certainly bodes well for helping us with revenue and I think margins directionally similar to the potential of that business today. It gives us good leveraging on our fixed. It helps us some day when perhaps there are headwinds in end markets. We’ll be happy that we made this investment. It will contribute to upside in fiscal '21 and we'll just have to hold off until we provide segment guidance later this year.

Okay, got it. Thanks a lot.

Yeah. Good to try though Eric. Thanks.

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

Thanks. Good morning.

Good morning, Brent.

Hey Jim, do you have what the impact of the startup cost were to the first quarter?

Yes. It was - yes, so in Architectural Glass it is about 60 basis points of impact.

Okay. And I'm trying to think of the puts and takes to the year. I know you're going to have kind of more amplified impact here in the 2Q, 3Q. Should that be offset by better productivity just given all the other things you guys talked about such that maybe we see sort of stable margins here over the next couple of quarters and that picks up in 4Q? Is that the way to think about it?

I mean, it'll still be a bit dilutive in Q2 and Q3. Those are going to be much heavier in terms of the impact, it will be over a 100 basis points impact in each of those quarters for the segment.

But the core business itself, Brent, as I mentioned in the prior question that Eric asked, you know, the Glass business, the momentum on, its productivity in its traditional business we expect continued productivity improvements that's in our guidance for the year. But the project you're asking about will be cost headwinds for a couple of more quarters.

Got it. Okay. And then on the Services business, obviously, very robust environment. Maybe you could you talk a little bit just about the terms, the evolution in terms you're seeing on some of these new contracts you're signing, is it a relatively tight market out there?

No. No changes in fees and terms and conditions on the projects we're working on. I mentioned, I'm most proud of that business for their disciplined approach to project selection and then project execution. It's all about getting your estimates right. I think we're the best in the industry, frankly. And yes that - and of course, we have to execute at the job site where we're doing a fab assembly glaze in our factories and at the construction site itself. Nothing changing, I would say, on the - in the contract. We're all been bidding. There's healthy competition out there. We've got great competitors. But I - we're a great competitor as well. I think we’re winning our share more than our fair share of projects. It's a very, very fragmented market. This is a great business for us. We're one of the bigger players and we have a fraction of the end markets. So there's a lot of work to select and compete against and I think we're seeing consistent bids on margin and terms. So sorry, nothing exciting, changing on that.

That's okay. Maybe last question, you talked a little bit about it, Joe, I know you don't like to blame weather. But obviously, there's been some pretty tremendous thing happening out in the mid-west. Is that continue -- is that having a material impact on the business? Or with the customer base that you serve out there? Maybe if you could just talk about that?

Nothing to call out, Brent. We feel – its terrible for the people that are impacted. Our facilities have not been impacted and when you picture the kind of work we’re doing, we're not – that building is going up where we’re seeing some of the devastation to this really bizarre weather pattern hitting parts of the U.S. So its unfortunate, as we’ve been fortunate has not really impacted our company.

In our smaller projects, framing system segment, as I think everyone is aware rain has just been a really significant issue. It's not enough for us to call off, but it's probably affected the timeline of certain projects where construction activity gets delayed and moved out a little bit, particularly in our smaller projects business, but none.

What I called out was kind of the severe winter weather, kind of continued to provide challenges for our productivity recovery at our Glass business, Viracon, a little bit. Again, not calling it out, but it certainly - glad that winter's behind us on - so our Glass momentum is just picking up again.

Okay, great. Thank you.

Yeah. Thanks, Brent.

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

Morning, Joe, Jim.

Hey, Jon.

Joe, as the problems at EFCO become more of an item of the past, how would you view the opportunity, the potential at EFCO relative - today - relative to your expectations originally when you acquired it? And what about the timeline of realizing that potential? Can you talk a little bit about that…

Yes, we. Yeah. Sure, John, thanks. Yes I - the potential for that business is amazing. It's very - it looks very much like what we have often call our legacy, the three businesses in this segment that existed when I arrived here. They do the same finishing, extrusion, window and wall production and sales, similar end markets, a little more diverse customer base, which we like. We stated this would be a double-digit operating margin business. Our starting point was lower than we thought when we did the acquisition. As we said we're getting a problem projects out from under. Apogee has been a tremendous help to EFCO for that. They would be the first to admit it. We put some new people in place both at the top in operations, in sales, we've got a great core team that had great experience in engineering and estimating. So that business is now it's way too double-digit type. I would say over the next 3 years, I certainly expect to break that barrier and I'm looking for a few 100 basis points and margin expansion every year from that business. Q1 was, as I mentioned, they had an excellent quarter. Frankly, I was very happy with the business performance. I told the team that as they got out from under, a couple of these really problem projects that were booked just about the time of prior to acquisition that they would see amazing momentum and they're seeing it. And as I mentioned, that business which has been - we took the project management and installation away from them on these particular projects we’ve called out, turned that over to our exports and the services. They focused on manufacturing, quality units, which they’ve done, they’re almost done. And now their full attention is working on productivity. I mentioned a nice project we approved a year ago. This tomorrow we actually start to put in the live operation this improvement in our back end of manufacturing from primary our shipping automation. So that business will continue to drive momentum. My goal is to get that above 10% over a 3 year horizon. My starting point just got pushed back a year or 2 from my original expectations. This - it's gem of a business and it's nicely with rest of the Framing Systems segment.

And Jon, it's Jim. I just want to emphasize Joe's point because I think your question was spot on. We've been talking about the benefits that we see getting this legacy project behind us. And I think a little bit in the fourth quarter and as we talked about it in the first quarter, I think, getting that largely behind us is really allowed us to have the visibility of the momentum of their productivity improvements that we’ve been working on.

Okay. Joe or Jim, I think – I know you mentioned that – I think you putting another $10 million, I think it was $10 million into EFCO. To get to that double-digit we’ll require additional investment - capital investment you think?

Nothing, no. This was a big investment we identified before we even bought the company. Frankly, the business that identified it. This was important, the prior owners were not going to make that investment. We made it. Going forward, traditional tooling, perhaps some CNC investment, everything that would normally fall into our operate, maintain and productivity projects. Nothing that I would call out as a substantial investment like this one.

Yeah, and any large investment that we would see I would anticipate them to be driven by productivity that would pay for themselves.

Okay. All right. Thank you very much.

Yeah, Jon. Thanks. Appreciate the questions.

Thank you. And our next question comes from the line of Julio Romero from Sidoti & Company. Your line is now open.

Hi, good morning.

Good morning.

Hi, Julio. How are you doing?

Very good. Can I ask about the increased focus you're putting on procurement in the Framing business? Maybe if you can just talk about what kind of margin opportunity you see there? And if there are any similar opportunities across any of your businesses?

Julio, this is Jim. I'll address that. So first of all when we acquired EFCO one of that low-hanging fruit opportunities we saw was specific to the EFCO business and leveraging similar vendors and purchases and those types of things with that business, which we went after upfront. What we're doing now is redirecting and taking a broader look at the entire framing systems segment, as well as across the Apogee. And frankly, we’ve engaged some outside resources to really accelerate and drive focus on this effort that we think is going to really help us. And we're look at everything, we're looking at direct materials, indirect materials and kind of all categories to spend. Really just launching this more focused initiative, and it's too early now to really call what we think the margin impact is. But we think there's a lot of opportunity for us as we really take a more holistic focus on driving materials synergy benefits across our supply chain.

Okay. That's helpful. And since you mentioned you do expect to improve revenue and margins in the Services business in fiscal '21. Can you give us any color on maybe what the margin profile for the work there it looks like for 2021? And if the project schedules can point to maybe cadence of earnings in that segment?

Yeah. Let me take it first and Jim can pile on. Again I'll repeat, we're not providing guidance for fiscal '21 today. The backlog for this business kind of speaks for itself. We certainly call out the backlog in our Q, which goes out, I think, next week. It is $39 million higher than it was at the last earnings release. That was a record. I mentioned on the call today, you know, I choose my words carefully because I can't guarantee a backlog increase in Q2. But if orders go into contract as I expect, we will have increase in backlog in the second quarter. But I always hedge my bet on that. But it's - the work in that business is strong, so it's mostly at - I don't think there's a significant movement in margins. It's good business. It's business that we believe we can execute well. And it will be a primarily driven by volume leveraging next year. But as far as year-over-year revenue growth guidance, we're not prepared to do that today.

Yes, Julia, what we have comment on is you know, based on the visibility of the work that we have, with all the caveats over it, it all depends on what the timing of the actually flow is in the actual project execution. But from what we see today we have visibility that fiscal '21 has the potential to perform similar to fiscal '19 for the Architectural Services segment.

Yes. And because it's such a big business for us that provides lumpiness, I wish I - as a public company, I wish I could report that business on a 2 year basis. It - we had an amazing fiscal '19, a record year across every metric, and yet our backlog today is stronger than it was, at this time proceeding that record year. Okay. So you get frustrated, well, why can't F '20 be another record? It's just the timing of the way projects work. We're in the construction world. And I ask you would have 2 year look at it as well. It is performing well and will have a very, very sound fiscal '21 based on our current backlog in view of the work we're continuing to put in the backlog.

Okay. That’s helpful. And I certainly appreciate the color there. Just last one from is, you amended the credit facilities to give some better flexibility. You also repurchased some shares, which is certainly encouraging. Could you just kind of outline what you see your capital allocation priorities are going forward? Thank you.

Sure. Our first priority is continuing to look at attractive investments back in the business from a capital perspective. Our dividend remains important. I think we’re looking at using excess free cash flow to pay down debt that we will continue to evaluate share repurchases. You know, M&A is still really back burner for us as we are really focused on driving the margin improvement in our business.

Helpful. Thanks very much and good luck in the rest of the fiscal year.

Thanks, Julio.

Thank you. And our next question comes from the line of Bill Dezellem with Tieton Capital. Your line is now open.

Hi. Thank you. I actually would like to follow up on that last question to start with the increase credit facility? Is this is solely for flexibility running the business from a working capital perspective? Or do you have additional initiative, not M&A, but whether it be something like what you're doing with framing or something like glass initiative that you are give yourself extra flexibility for that you already have some visibility that – that you’re going to be putting these initiatives in place? Can you talk to that, please?

Bill, let me give a macro and Jim will give you the details. Clearly, it is not to support M&A. As Jim said, that’s obviously, repeated certainly back burner for us. It was a good time to lock in more favorable terms and reset that block for 5 years. Who knows what will happen in the end markets. We're in a strong position to get these terms. But it wasn't for any specific need. Jim?

Yeah. So I'll just expand. I mean, it really is all driven by increased flexibility, driven by working capital and CapEx. But then in addition, in terms of – its got some differences in the structure Bill, that actually allow us over the term of this revolver to adjust the sizing of it too and with the expectation of our good cash flow generation over the next year's we even have increased flexibility relative to managing that commitment level.

Great. Thank you. And at then I would like to shift to the Framing initiatives on the supply chain front that you have. So I understand that its - what you're doing is to improve margins longer term. I don't understand why you are having the impact – the negative impact on margins here in the second quarter? Could you talk about the kind of the business activity that's moving to – that’s leading to those headwinds in Q2?

Sure. Bill, this is Jim. And I'm not going to go into too many details here. But it's really two things. One is, I mentioned that we're going to use some outside resources that help accelerate our focus on some first thing initiatives and so there's going to be little bit of upfront costs associated with that. And then as we look at rebalancing some of the operational activities, there's just really normal expenses associated with it some of those activities within our businesses in the third quarter.

Okay. That sounds like when I'll take up off-line to understand better. And then my final question, as we look out to next year, and I recognize you don't want to provide guidance, however, I'd just like to think about the fiscal '21 conceptually. You talked about the Service business having higher revenues and profitability next year, the Framing business will no longer have to add EFCO projects, the stage will be complete which will then give them an opportunity to assign and show if its right, some above trend revenue growth? And the new glass initiative, we are also above trend revenue growth. So if you put all that together, that implies next year you should be setting ourselves up for something that is an above average level of earnings growth beyond what one would normally expect. Is there something that I am missing with this thought process?

I do not believe you're missing anything with your thought prospects. We - our larger project businesses where we kind of have better visibility for revenue, meaning working on a large project today that our revenue next year, services obviously, will be a strong year, glass, we - what we see feel, we feel that will be a solid improvement, especially with initiatives we have. Framing Systems, mix of shorter lead time. Our focus there is cost, productivity and our Large-Scale Optical business, I think, we’ll continue to perform with small - continue to give us the cash and working capital help that it does. So, Bill, I don't think you said any that I would take issue with.

Great. Thank you, both.

Thank you, Bill.

Thank you.

Look forward to follow up.

And I'm showing no further questions at this time. So with that, I'll turn the call back to Joe Puishys for closing remarks.

All right, Andrew, thank you. All right, thanks again everybody for joining us today. Certainly, I appreciate your interest in my company, and I look forward to updating you on our second quarter performance and results in September. And have a great day, everybody. Take care. Thank you.

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