Ladies and gentlemen, thank you for standing by and welcome to Apogee's Fiscal 2021 Third Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker 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 third 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. With that, I'll turn the call over to you, Joe.

Alright. Thank you, Jeff, and a big thank you to everyone for joining us this morning. I'm very proud of our team and pleased to present our strong results this quarter. We delivered earnings growth and very strong cash flow despite the current operating environment in the non-residential construction market. Our results demonstrate the underlying strength and resilience of our company and team and the counter measures we have taken to reduce costs. This morning, I will review a few 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. Let me start with the highlights from the quarter. Overall, this quarter was nicely similar to the second quarter with earnings per share growth and strong cash flows, despite reduced sales volumes. COVID and end market conditions are still having a significant impact on our business. We continue to see some project delays, and note that the Architectural Billing Index this week reflected a score of 46. So we did in the mid to upper 40s for a few months now, which is a modest decline in month-to-month. The overall pace of activity in architectural end markets has continued to slow down. And COVID has continued to impact our workforce and added stress for organization and management team. That said, we have truly learned how to operate extremely efficiently in a COVID environment. I want to commend the entire Apogee team for staying focused and doing a terrific job of managing through this situation while delivering for our customers. These decisive actions we took in response to COVID earlier in the year have…

Thanks, Joe, and good morning, everyone. Let me start with our consolidated results, which are on Page 5 of our earnings presentation. Total revenue was $314 million, down 7% from last year's third quarter, primary reflecting continued project delays and market related volume declines in Architectural Framing Systems and Architectural Glass. This was partially offset by year-over-year growth in our other two segments. Operating margin was 15.9%. This included a $19 million gains on the sale and leaseback transaction we completed during the quarter, and a $1.4 million of COVID-related costs. Excluding these two items, adjusted operating margin was 10.1%, a nice improvement over 6.4% in the last year's third quarter, despite the lower volume. The improved margin was primarily driven by our cost saving efforts, improved execution and the benefit from a tax credit related to prior investments in our Architectural Glass segment. Adjusted EBITDA improved to $44.5 million, compared to $33.7 million in last year's third quarter, reflecting the improved margins, which offset the impact of lower revenue. Net interest expense was $1.5 million, down from $2 million last year, due to both lower debt balances and lower borrowing costs. The tax rate of 23.5% was roughly in line with last year's 23.2% and we reduced our diluted share count to 26.2 million reflecting share repurchases during the quarter. Putting it all together, adjusted earnings grew to $0.90 per share up from $0.57 per share in the prior year quarter. Now turning to segment results on Page 6. Architectural Framing Systems revenue of $137 million was down 17% from prior year driven by combination of project delays and lower order volumes. Despite this revenue decline, Framing Systems operating income improved 7.2 million, with an operating margin of 5.3%, compared to 3.8% in the last year’s third quarter. Framing…

Alright. Thank you, Nisheet. Well, this will be my last earnings call with Apogee. I look forward to welcoming Apogee's next CEO as soon as that person is announced. But I want to thank all of you on the call, all of Apogee's shareholders and all my team for support over these years. I am quite proud of what the Apogee team has accomplished over the last decade, and I'm confident this company has a bright future ahead of it. My confidence is bolstered by the team I will leave behind. From the boardroom to the shop floor, we had added talent at all levels of the company. I want to close by thanking every member of the Apogee team, past and present, what you've done to support me, and more importantly, the company. Thank you. Joelle, if you could open up the call for questions, please?

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

So, it looks like on the framing backlog, was up a little bit sequentially, down a little bit year-over-year. Can you maybe talk about the framing orders for Q3 a little bit?

You're correct. It was an average quarter. It is a mix of shorter and longer lead time businesses. It's where we're seeing the biggest impact from the soft market conditions. The order volume is down about 20%. It's been improving, but it's down 20% year-to-date. It does have a solid backlog in the longer lead time parts of Framing Systems, but we certainly need to book some additional project wins in the remainder of the year. It's pretty healthy considering the COVID environment in my opinion. We are pleased with a slight increase sequentially.

Got it. Thanks. And in terms of -- I'm just trying to get a better feel in terms of geographic strength and weakness, it's as much disparity. Recognizing that the ABI is only one indicator, was down in November, different pieces within that, the Midwest was actually improved versus a very weak Northeast. Can you talk about Q3 results in terms of how they line-up with that ABI geographic breakdown? Were they consistent there?

Yes, the ABI has two -- it’s broken down two ways. One is regionally and one is segment. And first let me preamble by saying, most people don't know what the ABI actually -- the calculation. It's a survey of architects. And basically, it's a question of, are your billings increased or decreased from last month? So, it's a binary answer, yes or no? If the same number of people answer, my bills are higher, that say my bills are lower, the index would be 50. It does not account for 10 -- say you’re up 10% and say you’re down 1%, it will still be 50. So, it's indicative and you watch it over time. I wouldn’t have -- stay that -- Chris in the last downturn, 11 years ago, the ABI was in the 30s, below 30s for a sustained period of time. So, I'm not too nervous. I see it coming back. It's been hovering in the mid to upper 40s. And hopefully, I think the end markets were sound when we entered this, it will come back. I believe most CEOs like me believe in work-from-work not work-from-home. You're right in the regional breakdown, the Midwest was the strongest. It was slightly over 50. The Northeast reaches under 40. And we are certainly dependent on the Midwest. It's a big part of our geographic footprint. That sector breakdown was, the strongest was multifamily residential, that the acquisition of -- the recent acquisitions we've done, EFCO is strong in that segment. Traditionally, we had not been. Institutional is the weakest segment. And most of that is government, public institutional. I think private institutional healthcare will continue to rebound. And we have a good presence there. But we certainly need office to rebound. And I do believe it will recover as people start to come back. Project inquiries were over 50. Again, that's a healthy sign. We just need more trigger pulling. We are definitely seeing folks put ammo in the barrel. We just need to have some triggers pulled. Hope that helps, Chris?

That’s very, very helpful. Almost done. Obviously, nobody has a crystal ball. But kind of looking at what the full case would be for the second half of fiscal '22, would it be on the framing side? Would it be the quick turn framing that would likely be the biggest and earliest beneficiary or how should I look at that?

Yes, the shorter lead time businesses and in our Framing Systems, it's got a very healthy mix of small and midsized projects. It does have some dependency on the large buildings, less than the other sectors I just mentioned. Glass has moved nicely down in the mid markets. And of course, the launch of our Velocity brand has given us a footprint in the small projects. But the smaller, shorter lead time, two, three weekly time businesses at Velocity and in Framing Systems will recover first. And then the larger projects will follow. I think the second half of the year, next year, it's likely to see end market activity improve, which will bode well for our fiscal ‘23.

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

Hey, Joe, on the Dallas Velocity facility, how far are you from being at a level of operating performance you expect from the new asset and do you felt that like you can get there even in this sort of environment?

Yes. We're not quite at the breakeven, yet. I expect this business to be accretive to operating results in fiscal '22. Revenues and orders grew again in Q3. Business continue -- we're still operating at a slight loss, but slightly lower revenues, I'd say. A healthy indication is the businesses had to deal with more ramp up issues than expected. They're getting through that. I'm happy that the demand for that small project is healthy. The customer retention rate is amazingly high because of the amazing quality and highly automated factory. I'm very confident in the long-term. We are committed to the expansion in this part of our -- of the market in our long-term growth and diversification strategy. But I expect it to be accretive next year.

And then Nisheet thanks for the details on 4Q. I guess any color on LSO, really nice recovery here? Should we think that business kind of goes back to its normal cadence in the fourth quarter kind of that post-holidays slowdown or is there some pent-up demand here?

Yes. So LSO is definitely coming back to normal. And in these times, as you can imagine, where people are still locked down at home, they want to do things, and they're going out there to these stores and buying things for DIY stuff. And as they go there, they also look at custom framing opportunities. So definitely, it's coming back to normalcy, and we expect that by end of Q4 the business will be back up and running in a normal way, barring any new COVID surprises. There are some, obviously, risks that come with COVID and certain retail markets being shut down. But if that doesn't happen, we should be back up and running as a normal business, similar to FY '20 in year FY '22.

Okay. And I apologize I missed this, but the new markets tax credit transaction, it sounds like you may see some additional benefits. I mean any sense on the timing of that going forward?

Yes. So if you look at our filings that we have done, we have benefits coming from new market tax credit, three more coming up in FY '24 and FY '26. They are about a $12 million additional benefit that will come in those years, and it is 5 projects detailed out in our SEC filings.

Okay. And Joe, just -- I guess I want to come back to the framing business. I mean the trend in backlog just differ so much from, I mean, what you're seeing on the top-line. I'm just curious -- I know the backlog contains sort of more of that custom larger project stuff. What do you think has been the difference maker in terms of end sectors that is causing that difference in top-line versus backlog trend in framing?

You mean the increased backlog trend?

Correct.

Listen, it's a mix of small projects, which really don't impact backlog, our storefront and entrance businesses that -- going to the brand names, Tubelite, Alumicor, a very quick turn, a little hard -- very hard to forecast, frankly. A lot of delays and then rush, rush, rush on those orders. But order and delivery within a 2 to 4-week cycle, so it's book-to-bill fast turn with medium and larger projects, which have much longer lead time. We do have some curtainwall business in our Wausau and Sotawall entities and to a small degree in EFCO. And we are -- those are the businesses that are seeing some slowness in the projects in the field. But we haven't seen any projects, Brent, canceled. We're just seeing delays. I mean even though the construction sites are open -- you read the news, there are a lot of people on quarantine from COVID. So progress at construction sites is going slow. That slows down orders. It slows down the start-up of the next project. But there's still pent-up demand out there. And I think post vaccine, we'll see that turn. But the business does have a large backlog. It's a healthy backlog that they can use to sustain themselves, but we still need to see some improvement in the COVID situation before we'll see top-line revenue return.

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

I have a couple of questions. First of all, the glass revenues were only down 5%, whereas the framing revenues were down 17%. Would you please kind of help us understand why those two segments had such a wide dispersion of results?

Well, I'll give you a higher altitude, maybe Nisheet might want to jump in. But we're seeing growth in our Velocity small projects business. That revenue growth is helping offset a higher contraction in the core branded business, that's in our solar. And we also have had a pretty good strength in a very small piece of that segment, but it's our Brazilian -- our South American operation has seen growth. Thankfully, our Brazilian business has returned to growth, and it's had great operating results. When I arrived 10 years ago, Viracon was losing money. Our glass segment was losing money. The Brazilian business was double-digit operating margins. It has subsequently gone into an economic downturn that made the previous crisis in the U.S. pale by comparison. So that economy is returning, financing is strong. So those two smaller businesses have helped offset what would have been probably low double-digit, low-teens contraction in end markets. And it's just -- also it's more of a lumpy business as well. And so, we're pleased with the results considering.

Yes, I have nothing further to add.

Alright. May I dive further into Brazil? Just given how weak that business has been, frankly, it's falling off of our radar. Is that a business that we should be thinking about more front and center?

No. We're pleased with the business. It's run by a good team. We'd like to grow the business. It's a very small and consequential piece of the whole segment. So the answer is no.

Okay. Great. Thanks, Joe. And then one additional question, please. Did you see your customers' behavior improve at all well before the recent surge in case count again?

I'm not quite with you, Bill. Can you expand and address me, our customers' behavior?

Yes. In terms of decision-making, where they were making decisions, starting to have a more favorable mindset, maybe inquiries going up. And then I guess the converse of that question is, as the case count rose here in the last while, did you see them become more conservative with their mindset?

I would say, in general, the answer is affirmative, yes. I think it mirrors what we're seeing in the United States. But like our company -- I'll tell you what, the amount of people we quarantined due to contact tracing in the third quarter, would’ve crippled us in March. We have learned how to operate that way. We haven't called out productivity problems, which -- so we've learned, that's true for the -- I think a good part of the U.S. economy. People have learned how to get people on quarantine, bring them back. We've all learned how to be efficient in this new model. And frankly, as I said, our on-time and complete and our first class quality yields have never been better at this time. I would say, yes, the end markets -- we started to feel better in the summer, the turn for the worse with COVID had everyone pause, but I'll repeat, Bill, we have not seen any projects canceled. The only project I can recall off the top of my head that canceled was a headquarters for one of the large cruise lines, early in the crisis canceled an order we had. I think, I had come out of our glass backlog, and no surprise that a cruise line would do that. Other than that, I can't name one in the hundreds and thousands of orders we had in backlog.

Great. Happy retirement and Mary Christmas.

Thank you very much, and thank you, Bill.

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

So a couple of quarters in, just curious how you're thinking, the -- well, whether there's a structural change in the market, the large office versus the decentralized office? And I know that certainly, Velocity plays into that. But what are some of your kind of high-level thoughts now that we're a couple of quarters removed when everything hit?

I believe that -- Eric, it's Joe here. I believe that trend will happen. It's still pretty early. But I do believe remote offices do have a strong future, but it's not just Velocity. We're not talking about storefront operations here. We may be talking about buildings that are 5, 8 to 10 stories. We've always been able to play in that market. And in the past decade, Viracon has become very proficient at servicing that shorter lead time business, not as short as the Velocity lead time. I believe that is going to be tailwinds for us in our industry. I do not believe we're seeing the demise of large buildings as well. We -- a one trend that will continue to drive large buildings is a multifamily housing. We don't see that trend turning around for -- we see that maintaining its growth trajectory. And with some of the acquisitions we've made, we play in that market, not only in glass, but in the Framing Systems segment. So I think -- and again, I still believe when the economy improves, we will see a return to the office, and I would expect a very rapid increase. And I think Apogee needs to be prepared to handle the next spike better than we handled last spike, and that's what my replacement will be challenged to do.

Got it. Well -- and I'll ask this question, and maybe this will be a question for whoever may be in that seat going forward. But in terms of the service business, obviously, some headwinds or more headwinds in framing and glass. Services has been fantastic. Given where you brought that to in the execution, is that something where potentially you think about expanding that? And maybe -- because obviously, you can grow that substantially, but it would impact margins or maybe you grow that a little bit more, maybe margins hurt a little bit, but as a way to offset glass and framing here just given the uncertainty going forward a little bit?

It's a -- the answer is balanced. Yes, the leader of that segment is a phenomenal leader. He has got an amazing team. We are leveraging our disciplined project selection process and field execution and want to take that -- to increase our revenue profile. We want to be careful we are in a business that is very cyclical, and it is a heavy investment on engineers and program managers that take time to train and develop. You've got to be careful you don't overrun the growth curve, and then you do have very compressed margins. They have managed to thread that needle. But in the last couple of years, the new leader of that segment and I have agreed to increase our -- let's call it, our vision for how big that business can be. Not drunk-and-disorderly, we're not suggesting we're going to double down, but we believe we can increase that business and maintain our margin profile. I think as evidenced, as I mentioned, they booked over $500 million in orders in fiscal '20, winning share, executing flawlessly and that kind of track record can help them not look lumpy during the ups and downs of lumpy order cycles. So I would say it's a balanced answer, but we will look at growing that business.

Okay. Good. And maybe last one for me. Just on the cost reductions. And I know you've kind of laid out which ones are permanent, which ones are temporary. But when I look at the SG&A, for instance, in this quarter, I mean, it was a fantastic number. I’m just curious, I mean some of the gains, the one-time gains in the quarter, I mean, did that impact the SG&A number? And what is a more reasonable number or range that we should think about on the OpEx line going forward?

Yes. So the first is, of course, there are two big ticket items in sitting in SG&A that are causing this quarter to look really nice. That's not sustainable, and we should not factor them for the next years, one or two years, of course. The new market tax rate will come in as per the SEC filings. But beyond that, McCook is not going to happen. So McCook being about kind of $24 million -- or $20 million in profits and new market tax rate is $7 million. So let's back them out. If you back them out and look at our normal trends on our SG&A, a range of about, I would say, $53 million, $50 million a quarter is what we are looking at right now is a normal number. We are working really hard to reduce that. So as we mentioned, the $10 million to $20 million initiative that we're working on right now, that should take that $50 million to kind of a $45 million trend per quarter by end of fiscal '23. So more upside there than downside. And $50 million is the current trend, $45 million is FY '23 year-end kind of a run rate we're looking for.

Got it. Okay. I guess that's it for me. Best of luck, Joe.

Thank you very much. I appreciate that, Eric.

Thank you. Our next question comes from Julio Romero with Sidoti. Your line is now open.

Hey, Nisheet, I think you touched on this, but on the glass business, you expect revenue pushed out of Q4 due to project delays. So does your op margins in the glass business look closer to maybe that 4% margin you would have seen this quarter ex tax credit?

Yes. The number sounds about right. Of course, if you look at FY '22, the Velocity business has started to come into a breakeven position, and then it will be accretive for us by end of FY '22. So that should help us in improving this 4% margin. But in the current state, you're right.

Okay. And I guess, you are creating more flexibility across the business, both operationally and financially. But -- I mean, can you talk about -- and you also talked about accelerating kind of reinvestment into the business. So can you just talk about the projects without getting too specific, I guess, maybe how do you weigh capital projects in terms of flexibility versus rate of return?

Yes. So I think the first thing is the mention on investment is more about our fixed cost base. So we talked about kind of getting a top-tier firm to advise us on what kind of cost base we have and what is the benchmark suggesting. And we've discovered we have an opportunity as a company to improve our fixed cost base. We have taken that analysis and study, and we are starting to execute on the quick hits actions in Q3, Q4 this year. That will benefit in the next two years. That's a $10 million to $20 million we have mentioned. The investment needed to make that happen would be more around automation, back office consolidation where possible, so we can serve businesses better and also optimize our cost, looking at our infrastructure and support on cloud, servers and so on and how we can do that better. Those kind of investments, restructuring type of investments are being looked at there. To answer your other question about CapEx, we have a pretty disciplined process on CapEx, wherein we evaluate every project on a kind of a hurdle rate of about 15% ROIC that, that capital project should provide to us. So we've been looking at new investment ideas coming from each of our segment leaders, and there are a lot of interesting things that we'll be executing on as we move forward in the next one or two years.

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.

Alright. Thank you, Joelle. Listen, everybody, it's been a pleasure. I want to thank you all for your focus on our company as one of the top 20 shareholders in Apogee, I can assure you, I look forward to the next earnings call. I'll be on the sidelines in the sheet. Jeff and team, I'm looking forward to supporting you, and I'm looking forward to future quarters. I feel terrific about my investment and look forward to seeing you confirm that. So thank you, everybody. Have a wonderful holiday, and let's all look forward to, hopefully, a much better U.S. in 2021. Bless you all. Thank you. Bye, bye.

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