Ladies and gentlemen, thank you for standing by and welcome to the Apogee Enterprises Second Quarter 2021 Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] I would now like to hand the conference to your speaker today, Jeff Huebschen. Please go ahead, sir.

Thank you, Joelle. Good morning, and welcome to Apogee Enterprises Fiscal 2021 Second Quarter Earnings Call. With me today are Joe Puishys, Apogee's Chief Executive Officer; and Nisheet Gupta, 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. 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.

Okay. Thank you, Jeff, and good morning, everyone. Thanks for joining the call today. I'm very, very proud of our team for the results we delivered this quarter. On our last earnings call, I said we expected second quarter sales and operating income to increase in each and every one of our 4 segments relative to the first quarter, and that is exactly what we delivered. We achieved adjusted earnings of $0.73 a share in the second quarter, rebounding nicely from the $0.15 per share in the first quarter and well above prior year. The decisive actions we've taken in response to COVID have stabilized our business and driven strong earnings and cash flow despite a still challenging operating environment. This morning, I will review highlights from the quarter and discuss the trends we are seeing in the business and how we are positioned for the future. I'll then turn it over to Nisheet for additional details on the results, our financial condition and our outlook. After that, I'll take your questions, of course. So let's talk about the second quarter. Start with the highlights. First, we saw continued headwinds from COVID and economic conditions, which caused year-over-year revenue declines in three of our four segments, but margins and earnings rebounded strongly compared to the first quarter as our team did an impressive job of managing [indiscernible] control. Our cost savings are tracking ahead of expectations. Nisheet will provide more details on this when he remarks. Additionally, we had very strong execution across all four of our segments, with improved factory productivity, particularly in Architectural Glass, and we are seeing orders begin to ramp up at our Velocity Small Projects Glass business. Our Large-Scale Optical segment came back stronger than expected, returning to profitability in the quarter. Recall that in…

Thanks, Joe, and good morning, everyone. Let me start with our consolidated results for the quarter, which are on Page 6 of our earnings presentation. Total revenue was $319 million, down 11% from last year's second quarter, reflecting continued COVID- and market-related volume declines. Operating margin was 7.3%, and adjusted operating margin came in at 8%, above the 7.7% in last year's second quarter as our cost savings and improved productivity offset the impact of lower volumes. Adjusted results in the quarter excluded $1.3 million of COVID-related expenses and $1 million of costs related to a past acquisition and acquired projects. Full details can be found in the non-GAAP reconciliation tables in our earnings release. Adjusted EBITDA was $38.3 million compared to $39.2 million in last year's second quarter, reflecting the improved margins, which largely offset the impact of low revenue. Net interest expense was $1.3 million, down significantly from $2.6 million last year due to both our lower debt balances and lower borrowing costs. The tax rate of 23.7% was roughly in line with last year's level of 24%, and our diluted share count was $26.5 million, lower than $26.7 million last year due to our share repurchases over the past year. Putting it all together, we had adjusted earnings of $0.73 per share, up from $0.72 per share in the prior year quarter. Notably, adjusted earnings were more than 4x the $0.15 we delivered in the first quarter, which demonstrate the success we have had in stabilizing our business in response to COVID and the economic situation and in driving the sustainable operating improvements across our businesses. Now turning to segment results on Slide 7. Architectural Framing Systems revenue was $153 million, was down 18% from prior year, driven by a combination of project delays and lower auto…

All right. Thanks, Nisheet. I close by once again recognizing the entire Apogee family for what we've accomplished together over the last six months. Our employees have truly gone above and beyond to help our company deal with the impact of COVID and economic turmoil. We've made significant changes to our business to prioritize the health and safety of our team and to ensure that we can continue to operate and meet our customer needs. I am particularly proud to be part of the Apogee team. Looking ahead, the environment remains uncertain, but I'm optimistic about Apogee's direction for both the second half of the fiscal year, which will improve over the first half and for the long-term. Over the past several years, we've successfully executed a strategy to build a stronger, more resilient company. Our substantial backlog and strong financial condition, together with our talented team, gives us the resources to continue to manage through the current situation. And we will continue to push ourselves to drive better performance in our current business and develop new opportunities for growth. I look forward to sharing more details with you in the coming quarter. Okay, today is a big day. I announce my retirement from Apogee at the end of February 2021. 10 years at the helm, I'll be 63 years old. We built a new management team that is a terrific combination of experienced fenestration industry executives and new leaders with fresh eyes and ideas. We've launched aggressive cost and growth initiatives to substantially lower our cost base and grow. We've dealt with some problem projects, and they are now behind us, and we've added some very new strong leaders to our Board of Directors. I wanted to see this through. It's now my time. Until February, I will bleed company blood. With that, I'd like to open up for your questions. Joelle, if you could open up for questions, please.

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

Yes, maybe just start with LSO. Just trying to get a sense in terms of looking at Q2, I'd have -- some of that is probably a little bit of catch-up. I'm just trying to get a feel for whether the second half of the year will be kind of more normal compared to what you've seen historically or how much visibility you have there?

Yes, Chris, thanks. So first off, I don't really attribute to Q2 to catch up. Good news is the products we sell are in demand right now. As you're well aware, people cooped up in home and home products, everything from carpet flooring to arts and trinkets and trash so to speak, and people wanting to reframe art that's in their house. People had a lot of time to look at what's in their home, and I expect strong demand in that business going forward, plus they're launching new products at a pretty good clip in that business. We did ramp up to 85%. Our retailers came online late in the quarter. A lot of our pickup came from our independent distributors for the independent channel, and we expect our retailers to have a strong Q3. We're not projecting to get back to 100% this year, but we will continue to ramp up and improve. So, we feel very, very good about that business. And as you saw, mid-teens operating margins in a quarter where our factories were down for two thirds of the quarter is extremely impressive. So, we obviously have some upside in LSO. I think the demand is repetitive and we feel will continue to recover in the second half.

Got it. That's helpful.

Chris, I'm obligated to point out. Obviously, we don't expect the United States to go into another shutdown, but that business is clearly dependent. It doesn't fall into the critical infrastructure category that our Architectural segments did that we were allowed to at least keep running mostly. We don't expect any shutdown of retail in the United States again, but we'd be dependent on that. We feel really good about that business led by a terrific team.

Got it. Maybe I'll just jump over to Framing. I mean, Framing backlog down slightly year-over-year, but not terrible. Can you provide maybe some more details there? Are there certain types -- certain areas, certain types of business that are stronger or have more visibility at this point in time?

Listen, half the Framing Systems businesses are longer lead time, larger project category contributing to backlog. It tends to be lumpy, just like our Services segment is lumpy, which -- that segment has been kind of on a tear for the last few years, but I expect the Framing Systems will continue to be lumpy on that half. The shorter lead time businesses certainly saw delays and push-outs of schedules. I think there's an opportunity for us to grow that backlog with some of the wins we're chasing down right now. So, I wouldn't over read into the modest backlog reduction in the quarter. A couple of our longer lead time businesses chewed up backlog as we're waiting to put some new projects into backlog. Not a substantial issue for us at this time.

Got it. And last for me, just on the Small Glass, it sounds like it's going quite well. Can you provide a little more detail there?

Yes. Listen, I mentioned the world wants to put a dagger or a wooden stake in the heart of office. I think that's completely invalid. Clearly, tall office towers, people are concerned right now, folks like you, investors and analysts like you often work in large towers in cities and haven't been in the office in six months. Office segment is not dead. We've removed and substantially lowered our dependence on towers, I expect to see an increase in demand in smaller buildings, smaller remote offices, maybe rather than Manhattan people be in Westchester or Jersey City. But people are coming back. You saw the news this week. JP Morgan and Goldman are beginning to open their offices. I look in my office, we've got more people here. We're managing it appropriately given distancing and things. But I think office segment will return. I think we'll see stronger growth in the smaller office buildings, and that's what our Velocity Small Projects business is all about. We're winning share. We produced an amazing product, and we've been waiting for this business to take off, and we're starting to see that. I believe we will break the breakeven point here soon, and this will be a profit contributor for us in fiscal year -- fiscal '22. And I expect to achieve that point before the end of this fiscal year. So we are -- we've added capacity to that factory, meaning shifts, and feel this is a very successful move we've made.

And just to add one more thing, Chris, we have doubled our revenue in that Velocity business in quarter two versus quarter one. So, we are on the right track there.

And the decision to potentially add another facility is probably a year or so away at this stage?

Yes. I won't get into my future plans on that on this call, Chris. Sorry.

Sounds good.

I'll just say, I'm happy with what we've done so far. But good try, Chris.

Our next question comes from Eric Stine with Craig-Hallum. Your line is now open.

I mean, a lot of the questions that I have on the Velocity initiative, it sounds like not to be shared on this call. But I'm just curious, could you talk about the margins on that compared to the rest of the glass business given the level of automation, but also just that it's a different setup, shorter lead times versus the other parts of that business?

Sure. Listen, it's not a lower-margin product, it's actually slightly higher margin. Our cost basis is lower. Our automation is a very, very -- very high automation in that business. It does have the overhead of the start-up, some depreciation. And -- but at full run rate or -- and I don't mean running 24 hours a day, three shifts, but at normal run rate, couple of shifts of production, five days a week, the margins will be accretive to the overall Glass segment. It's a good margin business.

Got it. Got it. That's helpful. And maybe just turning to the retrofit business, maybe an update on where that stands? I know you've long had that $100 million goal. And just curious as you think about that business in the context of the current environment where maybe that's an area that people look at now just given some uncertainty related to COVID in the economy. I mean, is that an area that you think potentially sees an uptick given the current environment?

I think it has even more amazing upside now than it did when I launched it several years ago. We are above $50 million, on our way to $100 million. The industry paused. Frankly, right now, Eric, most buildings moved their attention to the inside of the building, spacing, floor layouts, directional settings for floors, just like we have in our company reconfiguring cubicles to ensure spacing due to COVID. It will -- when we get out from under COVID, the real growth is going to come as businesses try to attract talent into perhaps older offices that are outside the metropolitan cities, people will want to go into nice buildings, we believe the curtain wall and window renovation focus that exists will amp up. So, I believe the future is actually brighter. There's strong potential for the focus on sustainability and green. The investment community and the folks that are tracking companies are putting pressure on management for sustainability in green, as you're well aware. And I think the opportunity is even stronger and will be stronger after we get out from COVID. I would say this summer, we've seen a pause as people have totally focused on the inside of buildings. I think that will change here in the coming two quarters.

Okay. Got it. Maybe last one, it would be for Nisheet. Now you're, I guess, a little over a quarter in at Apogee. Just curious what you see? I mean, I know you're talking about cost cuts ahead of schedule and that you've upped the target in the near term. But as you look at it long-term, I mean, where are some of the areas that you with some fresh eyes see as the opportunity for Apogee?

Yes. So Eric, there are opportunities everywhere, and we have just started, right? So if we think about the cost structure, there's one, let's say, let's call it, the SG&A structure, which we are looking at very carefully now. This is an industry that goes through a cycle, and we are not prepared to flex our costs in the way we should be. So we're looking at how we can look at our SG&A structure to flex ourselves more as the cycle goes through. So we will see some significant actions coming from our side in the coming quarters around our SG&A structure as a company. That's one leg. The second is the COGS, and that's another big area where we will -- first of all, we've done the work with procurement and that's already showing up in our P&L. The second is nonprocurement-related COGS, which is a pretty large portion also of our COGS. We will be focusing on that substantially in the coming six months. And Joe and I have thought about certain plans on the COGS that we will lay out in the coming months with all of you. So I see significant opportunity in improving our cost structure while we go through the headwinds in the next 6 months to 18 months in this industry.

Our next question comes from Brent Thielman with D.A. Davidson. Your line is now open.

A question on the Services segment. You're putting up solid margins. I'm wondering if some of these additional precautions to keep people safe in the field is still having an effect on productivity and therefore, margins, it will be hard for me to imagine a year ago, you foresaw some of this in terms of building that into the bids?

No, we're not seeing any -- we're not seeing impact from COVID on this segment as far as productivity is concerned.

Yes. People are back in the factories, and we are fully up and running in most of our plants. So we don't see any impact right now on COVID. It's all kind of looking like normal even though volumes are not normal.

But your question was around the Services segment itself?

Correct.

Yes. No, we're not seeing productivity issues. When COVID first hit the constructions -- some construction sites, you have little bit of productivity headwinds, only a few people in a construction elevator going outside of the building. But it's back to normal now. We're good. Nothing to call out.

Okay. And then -- so the $1.3 million COVID-related adjustment, is that predominantly for the glass business then and just those productivity issues you had with the outbreak?

Half of that would be for the glass business and half of that is for other businesses.

Yes. The Glass segment is, by far, where we have the largest number of employees. So -- but that is -- almost everyone's back to work. We did have -- in Q1, we had a substantial number of people quarantined through social contact tracing, and that has come down substantially in Q2. And today, we're close to normal operations as far as people out of the building. But that's only...

Yes. Okay. And Joe, in any of your businesses, are you seeing any competition starting to make, we'll call it, sort of distressed decisions at the bid table, just trying to fill the coffers at sort of any price that are concerned for the future? Or has it been pretty rational?

I think it's been pretty rational in general. I'm sure my segment leaders could call out the occasional drunk and disorderly bid action. But I would say, it's been what I would call normal. There's always a project where somebody must be bidding to the wrong spec and you think they're drunk and disorderly, but nothing beyond what we're used to.

Our next question comes from Julio with Sidoti & Company.

First off, Joe, congrats on the retirement and your success in lessening the cyclicality over your tenure.

Thank you.

I guess my first question is just on the cost savings initiatives. The $50 million in savings you expect this year. So that would be roughly a 60-40 split between permanent reductions and temporary?

I would say it's more a half and half. Half is related to COVID-related response and cost actions and half is in procurement as well as in consolidation-related savings.

Okay. Lumber has been something that's risen pretty meaningfully year-to-date. Can you maybe discuss the effects of lumber on your glass business? I know you're a user there and maybe the timing of when that is your P&L?

Yes. Lumber -- well, we've absorbed the lumber increases. Overall, our procurement costs have been reduced based on the effort, the Apogee-wide effort we did last year, bringing in an outside firm to help us. I have a new Chief Procurement Officer that joined our company at the beginning of this calendar year. So we are absorbing the modest increases in lumber. You're absolutely correct. We are a big user of lumber for shipping our product. We have good contracts, and it's more than covered with all the actions we're taking. And in fact, in this quarter, as Nisheet called out, we increased our outlook for cost savings from procurement from what we talked about in Q1. So it's right -- it's all in there, but it's one of the few items that are providing headwinds, but not substantial.

Got it. And is your Velocity business a similar user as Viracon was or is?

It's similar, yes.

Okay. And I guess on LSO, you did see a nice top line rebound compared to the first quarter. Can you maybe discuss maybe an exit rate for how LSO was tracking on the top line in August? Was it up year-over-year or maybe close to up year-over-year?

I don't have logs in front of me, but it was close to prior year, maybe in that 85% to 90% range of the prior year. It's a very seasonal business. I did mention that our independent customers, the independent custom framers in the United States came on very strong in the quarter. Our retailers will probably be stronger in Q3. So it's just a very lumpy business when it comes. And it's such a small business, under $100 million, that it can be up and down in any given month. Yes. Like I said, it was in a -- it was pretty close to last year in August.

[Operator Instructions] Our next question comes from Bill Dezellem with Tieton Capital. Your line is now open.

What are you seeing just in terms of where we are in the process of returning to a normal order pattern in terms of behavior of customers? Would you talk to that, please?

Bill, you're asking about a specific segment or in general across Apogee?

I was really looking in general.

Well, it's different by segment, but we're -- certainly, we're -- the economy is pretty bad. I think projects in backlog and pipeline are moving forward with very few exceptions. In our Services segment, we are operating at historically record levels. There's clearly some slowing in activity, but we had such little total share of demand in the United States, and it's a very diversified segment. We can win and grow even in a down market, and we see reasonably good bidding activity, but it's clearly not at pre-COVID levels yet. In Glass, we've seen project delays, but they're moving forward. And as we mentioned, we're seeing a ramp-up in orders in our small projects business. It's nice to be a new entrant in a segment, like we are with the Small Project Glass business because you're growing no matter how good or bad the economy is. In Framing Systems, we're seeing the most impact from soft market conditions. As you've noted, we're down about 18% year-over-year in that segment. But we had improved profitability because of the cost actions we've taken. I think we'll probably book some and hopefully increase our backlog in that segment before the year is out, as we've been working on some nice projects. And in LSO, we're already seeing customers largely reopen, and I expect back to normalcy on inbound orders in that segment by the end of the year. So it's a mixed bag, but until COVID subsides, I think we're all in for a big question mark right now.

Right. So taking that a step further, you've referenced the ongoing project delays and yet you also did say in the larger cities, the construction that had been shut down, it's now reopened. Some of the kind of stringent work rules have been returned to bit of normal. That -- I'm having trouble reconciling that versus the project delays. Can you help fill in the blanks there?

Well, like I said, the construction is permitted in almost all locations, and most projects in our backlog are moving forward. They're just moving slightly slower-than-expected due to economic caution and the COVID-related friction, creating absences at the job site. Some minor supply disruptions, not ours and this is what's mostly impacted Framing Systems and Glass. But as every week goes by, we're seeing more and more workers back at the construction site and the progress in the building goes up. Nisheet, do you want to add anything?

Yes. I just wanted to just add to that to say, there are industries which have not really picked up based on the recovery of the economy. For example, hospitality industry, we have customers who are buying things in the hospitality industry, and those projects are getting delayed. Similarly, there are other industries where we see they have not picked up, and therefore, they've deferred their decisions on buying until things come back. None of those projects we're seeing cancellations as such, but we are seeing a delay.

Thank you. I'm not showing any further questions at this time. I would now like to turn the call back over to Joe Puishys for closing remarks.

Okay, Joelle. Thank you. All right, folks. I won't torture you anymore. I thank you all. I'll be talking to many of you next week in a couple of conferences that Nisheet and Jeff and I will be participating in, and we'll look forward to further connection to many of you that are on this phone and have a safe week and be good. Thank you all.

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