Ladies and gentlemen, thank you for standing by, and welcome to the Apogee Enterprises Fiscal 2020 Third Quarter Earnings Conference Call. [Operator Instructions]. I would now like to hand the conference over to your speaker today, Jeff Huebschen. Thank you. Please go ahead, sir.

Thank you, Shannon. Good morning, and welcome to Apogee Enterprises Fiscal 2020 Third 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, which is 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.

Thank you, Jeff. And thank you, everyone, for joining us this morning. By now, you have seen our release. Clearly, the results this quarter did not meet our expectations or yours. The shortfall in the quarter was primarily driven by operational difficulties and sales shortfalls in a couple of our Framing Systems business units. Jim and I will provide more detail on that throughout this morning. We are taking actions to address these issues, and I'll provide more information on that in a moment, as will Jim. Beyond these issues, our other businesses and our other business units are well positioned and have had a number of positives in the quarter. First, our Architectural Services segment continues to execute at high levels. They're performing better than expected with strong project execution and operating margins approaching 10%. Just as importantly, the segment continues to win in the marketplace, adding over $100 million to its already record backlog during the quarter, a 20% increase from the last quarter and a 40% increase from a year ago. And based on our current pipeline, we expect to see even more backlog growth in the fourth quarter in our Services segment. With this backlog, our Services business is positioned for solid top and bottom line growth for at least the next 2 years. Large-Scale Optical also continues to be a high performing business, delivering on planned growth in the quarter along with its usual impressive operating margins of 28%. In Architectural Glass, we continue to see improvement in operational performance in our factories, absorbing the start-up cost of our new factory. And we successfully launched that new facility in Texas, executing our strategy to grow in the small project segment of the market, which is the largest part of the Architectural Glass market. We shipped…

Thanks, Joe, and good morning. I'll begin with our consolidated results, which you can see on Page 7 of our earnings presentation. Total revenue came in at $338 million, down from last year's third quarter, primarily due to lower sales in Architectural Framing Systems and in Architectural Glass. Operating margin of 6.4% was down from 8.8% in last year's third quarter, reflecting leverage on the lower sales volumes and the operational challenges in Framing Systems that Joe mentioned. Adjusted EBITDA came in at $33.7 million compared to $42.7 million in last year's third quarter. Net interest and other expense decreased to $1.8 million, with lower effective interest rates resulting from the debt refinancing actions we announced last quarter. The tax rate of 23.2% was down slightly from last year's level, and our diluted share count dropped to 26.8 million from 28.2 million shares last year due to our share repurchases over the past year. Putting this all together, earnings were $0.57 per diluted share compared to $0.78 in the prior year quarter. Now I'll turn to segment results, which are on Slide 8 in the presentation. Framing Systems revenue was $166 million compared to $181 million in last year's third quarter. This decrease was largely due to customer-driven delays and operational difficulties in a couple of businesses. Operating income was $6.3 million with an operating margin of 3.8% compared to adjusted operating margin of 7.5% in last year's third quarter. Operating margins in the quarter were impacted by leverage on the lower volumes, higher-than-expected manufacturing costs and some operational challenges in a couple of businesses. Specifically, we had higher-than-expected manufacturing costs on some projects in one of our curtainwall businesses, requiring a revised total estimated project cost with resulting project to date margin write-downs. These projects remain profitable, but the…

All right. Thanks, Jim. Let me close by reiterating that we are not satisfied, and I am not satisfied with this quarter's results. We know where the issues are and we know what they are. We are moving quickly, taking actions that will drive improved results. Performance in much of our business remains strong. We have a solid financial position with attractive leverage. We have a substantial number of nonrecurring costs in fiscal '20. Additionally, our end markets remain supportive with indicators like the ABI, new construction starts and employment gains, all trending upward in the recent months. We like our businesses positioned for fiscal '21 and beyond as we work to resolve the near-term issues. Finally, before we open up for questions, I'd like to acknowledge Jim's decision to retire from Apogee as his role as CFO. Jim has been a key part of Apogee's leadership team for over 22 years. And I want to thank him for his dedication and many contributions over those years and primarily for being my friend. We are beginning a search for his successor, and Jim has agreed to stay on in his current role through the process to facilitate a smooth transition. Jim, we thank you. I thank you for everything you've done for us and for me. With that, I'd like to ask Shannon to open up the call for your questions. Shannon?

[Operator Instructions]. Our first question comes from Chris Moore with CJS.

Yes, maybe we could start with Framing. Yes, so the customer-driven delays, is there any common denominator in terms of kind of what was driving that?

Yes, Chris, this is Jim. As you know, there's a variety. But I'd say, if we did a Pareto of the top drivers, the number one is the schedule on the job sites themselves, and in a number of cases, our customers are kind of as we go further up the kind of value chain, if you want a construction project. Availability of labor has resulted in the projects just not progressing as fast in just the schedules on those projects move out. Similarly, we've -- and these are kind of normal issues that we just saw a higher rate of it is that projects that were scheduled to start, the general contractor was too optimistic about ability to get the project started and the start time line of those projects has moved out. So those are the Top 2 reasons, as I said, as kind of our industry and those happen all the time, but we've just seen a higher level of those types of scheduled delays.

Got you. In terms of the Framing challenges that were perhaps a little bit more self-inflicted, can you kind of break out? It sounds like some of the projects perhaps were mispriced, but -- and some where there were operational issues that you didn't anticipate, say, a quarter ago, something like that. Can you just talk to that a little bit more?

Yes. Chris, this is Joe. In one of our curtainwall businesses, manufacturing business, not our installation services, we're pretty darn full in the factory. We've had some complex projects at a time where the factory is very full. In the third quarter, we -- it became apparent to the business that the margin expectations were not going to be met. The challenges were pretty significant. We had to take a project adjustment for the revenues to date. And then the rest of the project is at the new margin. These are not -- there are 2 primary projects, they are not losses or low -- losing-money projects, but they are substantially below the original booked-in margin rate. The team has learned from this. We're bidding -- or we have -- we believe we're on about to win some more business that's very similar to this that's been priced substantially higher to reflect the learnings of the business. But this is really 2 primary projects in one of our curtainwall manufacturing businesses, and I believe we've learned our -- the business has learned its lesson and is pricing accordingly going forward.

And I'll just add as specifically is, there are a couple of projects that have a higher degree of manufacturing complexity that just became more of a challenge than was originally estimated. And as Joe mentioned that, when that started happening in a kind of at-capacity manufacturing environment in that facility, it became difficult to overcome and offset the beginning manufacturing costs for those projects.

Chris, one of the organization changes we made was, we've installed a new leader of our two curtainwall manufacturing businesses, who is -- who, frankly, grew up in the Services segment, doing large complex projects for companies like our Harmon Services segment business. He's been a direct report to me for the last 1.5 years, running our global operations, and this gentleman has moved into the leadership position of our two curtainwall businesses, and I'm expecting him to have a huge impact on addressing issues like we just talked about.

And those two primary projects, I mean, how big are they? Do they extend well into fiscal '21, or do you have any sense there?

Yes. So I mean, these projects will be largely complete by early, probably the first quarter of fiscal '21. I mean, smaller portion of it will carry into probably the second quarter. But a majority of it will carry into fiscal '21. So as we talked about, we had to do a true-up, which really was a charge in the third quarter. In the fourth quarter now, we'll see margin on these projects, but just at lower margin than was originally forecasted for these and kind of wrapping up early next fiscal year.

Our next question comes from Eric Stine with Craig-Hallum.

So just coming back to these two projects quickly. So I mean, just maybe talk about your confidence level that the write-downs you've taken on them that, that fully captures kind of where they should be going forward. And then I know you just laid out that you expect maybe a little bit into fiscal '21. But I mean, confidence that on new business that maybe fits this complexity profile that those will be priced appropriately with the appropriate margins going forward.

Yes. Eric, I'm confident that we obviously went to DEFCON 5 on these projects and put our top people at Apogee involved in this. We believe we have taken the margin write-downs to the level we can perform for the completion of the projects. As I mentioned, they are not lost projects but at substantially less margin than should have. And as I mentioned, as we're going forward, we're pricing substantially higher on similar business going forward. We can make the product. It is complex, but it is certainly in our wheelhouse. So I am confident in both the charges are behind us and that we can finish these projects as is with the current margin assumptions and that we're falling into backlog will be at normal margins.

Okay, got it. And then maybe on the cost reductions of $30 million to $40 million. I might have missed it, but did you call out a time frame, whether it's later in fiscal '21, when you think you'll be at that run rate in full...

Yes. Well, certainly, by the end of fiscal '21. We're not providing guidance for fiscal '21 now. I can say that there'll be substantial favorable impact in fiscal '21 over fiscal '20. Some of the savings begin relatively immediately. And through the first and second quarter, we'll get some -- a decent-sized piece of that. But we're just not going to provide the full impact to '21, but it will be fairly substantial.

Okay. No, that's great. And then lastly, I mean, it actually sounds like kind of nice that EFCO doesn't sound like that's really part of the missteps in Framing. So I guess, confirming that with you, but also I know that the last problem project, you've kind of talked about a few quarters of residual work. So just any thoughts about, are there any risks associated with wrapping that project up and kind of putting that behind you?

While EFCO has been performing well this year and meeting my expectations, they are -- the building is primarily enclosed, which means the windows and doors are almost all installed there on any project, there's what's called leave-outs, where the elevator shafts that go up the tower have to be removed, and then we complete the work. That's always a standard practice in the construction world. For the most part, EFCO is completed with that project. They have some small number of units to make. And listen, it's been a terrible project for us. It's been a financial blow. And I won't say that it's completely risk-free, but we believe we've got a good cost to complete estimates in our forecast. We continue to -- as I mentioned in the call, we did have a modest but a net gain on some of the things we've been going after in recoveries. We'll continue to work on claims against us and claims we have. I believe our forecast is balanced. A project is never risk-free until you've completed the project, which won't be until the first half of calendar 2020. But we're kind of on the 10-yard line and things have gone according to plan.

And then, Eric, just your opening comment and question about kind of the core EFCO business, as Joe said, they are performing to our expectations. We are seeing the improved productivity that we've been looking at in that business. And operationally, we're seeing improvements, and so our focus now is the emphasis from the operations side of the business to really driving kind of the top line opportunities in that business.

Our next question comes from Brent Thielman with D.A. Davidson.

Joe, you've been in this process of trying to kind of integrate all these subsidiaries within the Framing business. I guess, I wanted to take a step back and sort of ask the results here, to some degree, are a consequence of trying to do that? And does it give you any pause in terms of what you're trying to do there or sort of change the game plan at all for that?

Well, listen, Brent, first off, the performance for this segment was not acceptable. It is not a consequence of our effort to integrate and consolidate this. We are just getting started in that effort. We're being careful, and our goal is not to alienate customers or mess up the business, the performance issues. We believe the leadership changes we've made and that we're adding by creating the segment leader role is going to help us avoid these kinds of misses going forward. It's a big company. These 6 businesses are in the same operating segment. We have the opportunity to do a better job leveraging our manufacturing footprint, leveraging our product offering so that we don't launch new products in 1 business if we can leverage the same baseline products in another. All these things are in front of us, not behind us. And there was no causal factor on this quarter's performance because of our efforts to create this 1 operating segment.

Okay. And sort of parsing out the businesses that have been performed to your expectations, is the rest of the business kind of in that target low double digits margin range that you wanted to be at?

Yes.

Okay. And then, I guess, on Glass and the commentary about the foreign competition, I know they've been kind of in and out of the market. But I guess, what markets do you primarily see in that? And I think in the past, it principally been on the Eastern seaboard, but I thought kind of the Northeast was picking up for you. So maybe any comments there.

Well, the Northeast and the Midwest, it's primarily the large projects, the large towers. I've been pleased that the leader of that business and I and Jim, we spend a lot of time going over what kind of margins we're prepared to take. We, of course, will look at lower margin projects, if we believe it's strategically a good move. But we are also prepared to walk away and not chase low-margin work that company did that at Glass business back 10, 11 years ago, and that's why Apogee was losing money back in fiscal '11. We're not going to do that. It is a challenge. On the large monumental towers, lead time is not an issue, and product can come from virtually anywhere in the world and meet the lead times. We have good competitors around the world. And with the dollar to euro exchange rate at $1.11, it's -- it has opened up the door for foreign competition. The markets are pretty poor in our end markets in Europe, and this has become a good landing spot for that competition. We accept competition, that's the world we all live in, hence, our strategy to move into the mid-market and most recently into the small project segment. The small project segment is actually larger square footage than the combination of the large and the mid-market. So it's a strategic imperative for us. But we feel this competition in the large projects is here for the foreseeable future until we start to see recovery in their markets and hopefully, a more balanced exchange rate, and maybe I can return the favor someday.

Okay. Maybe on the small project facility, congratulations on getting that up and going. I guess, that -- any early thoughts on what you expect from that business in fiscal 2021? I know it's ramping up. And then kind of when you think that sort of gets to optimal capacity and the margins you expect from the business?

Yes. I can't provide guidance for fiscal '21. What I can tell you is the orders, the inbound increase in the orders bode well for us achieving or beating our investment thesis for that investment that we made. And they're producing excellent product. It's highly automated, it's amazing quality, and we'll provide more on that, but it will be a contributor in fiscal '21. We won't have the $5 million start-up costs. It'll have revenue in operating income in fiscal '21. So it will provide some upside and help us balance the risk we note in the large projects.

We have talked about that operation having a potential capacity of a range of $30 million to $50 million of annual revenue. It's a big range, but a lot of it depends upon mix and those types of things and would expect it to take a couple of years to ramp up to those levels.

Okay.

The customer feedback we've received, Brent, on our initial shipments has been phenomenally over-the-top positive. We're pleased with the performance. I didn't mean to cut you off, if you have another?

Our next question comes from Julio Romero with Sidoti.

First off, Jim, congratulations on the retirement and all of your success at Apogee.

Thank you, Julio.

I guess, on the overall guidance, did I hear you narrow your guidance range for the consolidated OP margin? I mean, you gave us plenty on the segment guidance, but just I'm sure if I missed anything on the consolidated margin there.

No. I mean, we didn't call that out.

Okay, fair enough. I guess, maybe on the Glass segment, you talked about the large-scale projects and that impact, but you also mentioned the customer-driven delays. Can you just elaborate on that at all? And if those are expected to persist into the next fiscal year?

This is Joe, Julio. I'll talk about Glass, and Jim can talk about the project delays or reiterate what he said. The project delays was within our Framing Systems segment. In Glass, that has not been something we called out here. No, I'll just repeat, I -- our Glass business has performed well. They have -- their margins absorbed the start-up costs in Q3, and there'll be more start-up costs in Q4 as we wrap this program up with the entry into the small projects. Very pleased with the performance. Volumes were off a little bit due to the share loss at the top, not dramatic. We'll continue to fight that battle in F '21 as we enjoy some revenue and margin pickup on the smaller and mid-segment project work. But the project delay issue was in a couple of our curtainwall projects in Framing systems and the mix of their projects.

Got it. I thought I heard you all the same out for the Glass business. So I guess, maybe just staying on that Glass business. On the new facility in Texas, can you just elaborate on -- I assume you'd have an ability to self-supply more glass to, say, EFCO and maybe some of your other businesses. And can you just talk about how that goes, maybe hand-in-hand with how you're thinking about Framing integration opportunities next year?

Yes. You're correct that, that business has the capability of supplying glass to our intercompany businesses, and that will be part of the $30 million to $50 million revenue profile, that Jim talked about, that we believe can come from that factory. We have great partners in our supply base for that business and are supporting them well with this new volume that we're bringing in. But that will be part and parcel to our growth going forward. We -- as I mentioned, we have several new leaders in many of our Framing Systems businesses that are folks that are coming from the Apogee ranks and businesses. So I've got more and more a mix of leaders that have come from other business segments, and I believe it promotes continued cross Apogee leveraging of our capabilities. And I'm looking forward to more and more across business units -- across the segments work in cooperation.

[Operator Instructions]. Our next question comes from Jon Braatz with Kansas City Capital.

Joe, the strategy behind the Architectural Framing business has been -- was that it's a simpler business, it will help protect you more when the cycle turns down. Yet this business is the one that's causing the most difficulty. Is -- has the business changed at all? Or is it not -- is it more complex and more susceptible to disruptions than maybe you were thinking originally? Is there something of consequence that has changed in that market segment that is creating the current difficulties?

That's a very fair question and challenge, Jon. The answer is no. The business is profiled as we have always had it. We do certainly have a couple of businesses in that segment that are focused on larger projects, a little bit of complexity and are susceptible to schedule issues on the project site. We do have a nice balance of very small project focus, our storefront and entrance business, kind of reliable, less lumpy, doesn't move substantially from 1 quarter to next. They've been performing consistently and then we -- all the way up to some large curtainwall projects, and those are the ones that had been a concern this quarter. We have good experience in large curtainwall projects. A lot of that experience comes out of our Service segment. I mentioned that our new leader of our 2 curtainwall businesses and Framing Systems basically comes from our Installation Services segment with great experience, and I believe we can eliminate some of these surprises with more consistent manufacturing performance in those 2 businesses. We have a good mix. We don't fire at all 6 cylinders at every quarter. This was a tough quarter for 2 of the larger businesses that we couldn't offset with performance in the other 4, but the mix is a good mix for us in the long term. And I believe we needed to make some changes with some of our leadership team.

The majority of the revenue -- Jon, the majority of the revenues in the Framing Systems segment is on the smaller projects, where, as we've talked, we do continue to see growth and good margin performance and is the focus for growth in that segment going forward.

Jim or Joe, would you imagine as you look ahead that, that given these current difficulties that the mix may change? Or will you -- do you like the way the ratio where it stands today?

I don't think the mix will change substantially. We will do a better job of having our growth focus tied to what we are better at. I mentioned a subtle point in my commentary, and it's no surprise that our Services segment has performed so well in the last few years, because they embarked on a journey 5 or 6 years ago on understanding project selection and understanding complexity, understanding through a history of forensics on where we performed well and where we didn't on large projects that I mentioned in this call that we are going to leverage the learnings from that business to do a better job of project selection inside of our Framing Systems segment. We have -- our strategy is a growth strategy, focused on better project selection. So we start with a better platform for success than we have shown in the last quarter.

Okay. Jim, the $30 million to $40 million in cost savings over the next year or so, will you retain that? Or will you reinvest some of those savings and maybe the net savings won't be as much as $30 million to $40 million?

I mean, that will be evaluated as we develop our plans for next year. Our intention, at this point, at least for fiscal '21, is to hang on to a majority of that.

And Jon, as you breakoff, I'll just say that -- to add to that, we will obviously look at short return investments and to the degree we can drive further cost out of the business. If that takes some investment, we will apply some of the savings to that opportunity. Do you have any more calls, Shannon?

Our Next question comes from Bill Dezellem with Tieton Capital.

I actually wanted to follow-up on that, the cost savings question. Would you characterize or breakout, if you would, that $30 million to $40 million in terms of where you are anticipating the savings coming from, number one? And then secondarily, what component of it are you just rock-solid on? And then how much potential upside is there to that $30 million to $40 million number?

So I'll provide a little color. As we -- as I said, we're not providing guidance for F '21. But I can tell you that of the $30 million to $40 million, the larger piece of that pie is our procurement initiative. I'm not going to say it's easy because it's certainly not. But a lot of heavy lifting has been going on for the last 3 months with our partner, the global firm that's helping us that I mentioned. We have identified a substantial portion of that and have more to go, and we'll be implementing procurement savings effectively immediately. So I feel really good about the component of that $30 million to $40 million that's on the procurement side. There's a little more heavy lifting to do on the Framing Systems synergies, but we feel really good about the opportunities. And let's face it. We have a low basis. We used to operate Framing Systems at substantially higher margins. I think getting back to those margins is certainly not an unrealistic expectation to get to -- back to where we should be and then drive synergies. So I feel good about the $30 million to $40 million or we wouldn't have put it in our guidance. I feel good that a big chunk of that is coming from procurement, which is a little bit easier to identify. And there are also some savings that will have to come from some really hard work within Framing Systems. A substantial portion will be felt in fiscal '21. And Bill, that's about as far as I can take it on today's call.

I'm going to see if maybe you'll go just a little bit further, even though I heard what you just said. What aspect beyond $30 million to $40 million is there in terms of the potential? But frankly, today, you are simply less clear on and, therefore, aren't able to discuss quantitatively. Is there a meaningful component that would fall into that category? Or has this been pretty well vetted and so you don't have a lot of, if I may call it, murky future opportunity?

The range that we put in this discussion today is not murky. It's fairly well identified. There is obviously a goal to drive much higher cost savings beyond that through continued hard work on product line management, continued procurement savings. This is -- this effort with AlixPartners is the beginning, not a one-shot deal. I mentioned I'm hiring a Chief Procurement Officer to make sure we deliver on these savings and then drive Phase 2 and Phase 3 going forward, meaning, it's just the beginning for procurement. I'm not going to tip my playing in -- playbook to our competitors with regards to the commercial opportunities that I expect my Framing Systems leader and business unit leaders to drive. Those are not quantified in that $30 million to $40 million. So yes, I expect to have long-term gains from operating that segment as 1 operating unit or 1 operating segment with different brands and our discrete factories that we have today.

Thank you. And I'm showing no further questions at this time. I'd like to turn the call back over to Joe Puishys for closing remarks.

All right. Thank you, Shannon. Okay. I will end where I started, which is we get it. I know we disappointed. I feel a strong commitment to seeing this improvement turnaround happen. I believe it will happen rapidly. And as I mentioned, I think we went through fiscal '21 with some substantial tailwinds on our side, both from the nonrecurring cost and project cost we've had this year, the elimination of the performance surprises, and substantial backlog increase you see at Apogee, primarily driven by Framing Systems, but also -- I'm sorry, by our Services segment, but also what we're seeing in future orders for Framing and our new project in Glass, I believe fiscal '21 will be a return to excellence for us. And you have my commitment to work tirelessly to achieve that. So I thank you for your attention today. Once again, I'd like to congratulate and thank Jim for his service to our company, his tireless service, and I wish you all a happy holiday and happy year end and a safe one. Thank you very much.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.