Ladies and gentlemen, thank you for standing by and welcome to the Q4 2021 Apogee Enterprise, Inc. Earnings 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 over to your speaker for today, Mr. Jeff Huebschen, you may begin.

Thank you, Tuwanda. Good morning and welcome to Apogee Enterprises' fiscal 2021 fourth quarter earnings call. With me today are Ty Silberhorn, 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 available on our website. I also would 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, Ty.

Thank you, Jeff and thanks everyone for joining us this morning. It's great to be with you on my first earnings call as Apogee's CEO and I'd like to thank the Apogee Board for putting their trust in me to lead this company. I'd also like to thank my predecessor, Joe Puishys, for his leadership of Apogee over the past decade as we wish him all the best. Well, it's been a busy first three months for me as you might expect. I spent time getting to know the business and building relationships with our team, gaining a deeper understanding of our markets and customers, and assessing the opportunities and challenges in front of us. I've learned a lot about the company these past 90 days, not the least of which is the knowledge and passion our team has for this business. We have work to do, but Apogee has tremendous long-term potential and an opportunity to build on its 70-plus year history. Now prior to joining Apogee, I led several businesses through strategic realignments and reshaping while also finding ways to deliver performance improvements in the near-term. This has given me invaluable experience, and I've also developed a passion for shaping long-term sustainable growth strategies while also driving stronger operational execution. This is what led me to Apogee. I saw a company with a decade's long successful track record of transforming its business as markets shift, and I saw the opportunity to help reset the overall growth strategy to build the next chapter in the company's history. I see significant potential for Apogee to grow in the future while also delivering improved returns as we move ahead. So, I'm very excited to collaborate with Apogee's leadership team and our employees to build that future together, one that delivers for…

Thanks, Ty and good morning everyone. I would like to echo Ty's comments about the opportunities we see ahead for our company. I'm excited to work together with Ty and the rest of Apogee's leadership team and employees as we continue to transform Apogee's business and strengthen our company's position. Let me start with consolidated results, which are on Page 6 of our earnings presentation. Total revenue was down 8% compared to last year's fourth quarter. The revenue drivers were similar to what we saw the past two quarters with softness in non-residential construction markets and project delays impacting Architectural Framing Systems and Architectural Glass, partially offset by growth in Architectural Services, which is supported by its significant backlog. Operating margin in the quarter included charges for impairment and restructuring. During the fourth quarter, we performed our annual impairment test on goodwill and intangible assets. The sustained decline on non-residential construction activity and weaker outlook in our end market led us to recognize a non-cash pre-tax impairment charge of $70 million in Architectural Framing Systems. We also had $4.9 million of restructuring charges in the quarter, which were primarily related to facility consolidation and fixed cost reductions in Framing Systems. While we continue to believe in the long-term potential of Framing Systems, leading indicators such as Architecture Billings Index and Dodge Momentum Index suggest a more challenging near-term outlook, which led to the impairment and restructuring decisions. Framing Systems made considerable progress during the year in optimizing its cost structure and taking steps towards a more integrated operating model. This will remain a focus in fiscal '22 as we position the segment for long-term growth and improved profitability. Excluding these charges, adjusted operating margin was 7.1%, a 190 basis point improvement compared to last year's fourth quarter as our savings…

Thanks, Nisheet. Apogee's team performed well in fiscal '21 responding to a very challenging year for our business and the industry. We overcame the impacts of COVID and difficult end market conditions to deliver adjusted earnings growth and record cash flow due in large part to our team's efforts to aggressively manage costs and improve execution. We also took important steps to strengthen our balance sheet, ensuring we have the resources to manage through the current situation while providing significant financial flexibility going forward. Looking ahead, we will build on the work we began in fiscal '21 accelerating our efforts to transform the company while driving stronger execution to deliver near-term results. Importantly, this will include work to develop a new enterprise strategy to better position Apogee for sustainable growth and higher returns. I look forward to sharing more details on our progress in the coming quarters. With that, we will open it up for your questions.

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

Thanks for taking a few questions. I'm trying to understand just a little bit better how the different areas of Apogee line up with the non-res cycle. So, Services obviously fairly strong at this point in time, Glass and that short lead Framing are softer, does that imply that Services will likely lag a bit when the Framing and Glass do pick up?

Yes, I would say that projects in the backlog right now in our pipeline are generally moving forward. The Services business has built a really strong backlog and they are working that backlog down right now. So the work that they did previously has put them in a very strong position for fiscal '22 and then some of the shorter cycle time businesses that we see with respect to Glass and Framing are feeling more of those immediate impacts on the cycle and the downturn that started early last year.

Got it. And in terms of the Glass and the shorter lead time, will they - specifically on the shorter lead time Framing, is it likely that they would be out front with the recovery or is there also some lag likely there?

Yes, so there is definitely a lag coming in shorter lead time projects and businesses also. We continue to see pressure in all of our businesses. It's easier to have visibility, Chris, on the shorter lead time projects, but we see end market pressure continuing on both shorter lead time and long lead time projects.

Got it. Yes, I was just trying to understand kind of, obviously now that you're - the shorter lead time stuff is definitely being impacted, I was trying to look out a little bit further in terms of that and Glass. I mean Glass historically has lagged the cycle, correct? Because that's the kind of the last thing that goes into the buildings.

That's right. Glass has usually lagged the cycle. We got Services, which is the longest lead time, let's say on cycle. Then we have the Glass and then we have some parts of Framing segment which are also longer cycle and then we have some businesses which are much shorter in Framing segment.

Got it. On the cost savings side, so it sounds like there is an additional $10 million to $20 million that you're targeting on the SG&A, $5 million of that happens in '22. So that's kind of somewhere between $5 million and $15 million additional cost savings in '23. Will additional investment be required in '23 to make that happen?

We are continuously evaluating the investments needed. Right now, we know we're going to be investing in fiscal '22 of the $7 million to $10 million we mentioned. We will evaluate the benefits and returns and make decisions on fiscal '23 in due course of time.

Got it. And the last one for me, maybe just talk a little bit more about the impact of raw material inflation near-term?

Sure, so we have a very strong procurement organization, Chris, as we had mentioned previously. We did a lot of work in fiscal '20. The results of those - that procurement work is visible in our cost savings chart on Slide 8. That work will continue in fiscal '22. We do have some headwinds in certain raw materials as you rightly pointed out. We are working to offset those with different categories in our procurement buckets. We have a lot of spending on direct and indirect beyond those pressured categories in raw material. We will continue to focus on them and we will continue to offset these pressures. I have to say that we will see continued raw material pressure during the fiscal '22 and our teams are working hard to offset those.

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

So, just want to kind of come back to the first or the previous questions, just it makes sense in fiscal '22 the cautious stance given that I mean that really reflects the bookings environment over the last 12 months since the pandemic started, but I guess in light of starting to see, I mean it's really early, but like the February ABI showing expansion for the first time in a year and some hiring trends starting to turn positive a little bit, maybe anything you can talk about just beyond the near-term. I mean are there reasons for optimism as you look to fiscal '23. Just how do you think of the business in that context?

Yes, this is Ty. I would say we're seeing some of those positive signs in those forward leading indicators. Those look like they bottomed last spring and we're starting to see some of that positivity come through, and this is a long lead time cycle business. So, some of that is pointing to some positivity as we look into fiscal '23, but the nearer term what we're seeing right now, especially in our Framing and Glass segment is that continued pressure from the projects that got slowed or stalled during COVID and as we entered into that down cycle. Again, we're using this down cycle as the opportunity to drive change in how we're going to transform the business. We've built a good foundation in fiscal '21 and I think the team really stepped into that and saw some things that we could do to execute better as we go forward. So we're going to use this opportunity to build on that and put ourselves in a much stronger position as the markets start to rebound so we can deliver stronger profit dollars and be more efficient in how we use our capital going forward.

Yes, understood. Maybe just sticking with that. I know this has been a question for Apogee over the years, but the Services business clearly is the - well, in addition to LSO, but Services and Architectural has been quite good. I mean, any thoughts on what the right growth rate is for that. I know that's a business that can be substantially larger, but you also want to stick to your margin targets and that sort of thing. So I mean, maybe just some longer-term, whether it's fiscal '23 or just even beyond that, where do you think Services can go?

Yes, I would say, as we mentioned, we're working on building that new enterprise growth strategy and certainly as we work through this, we'll be looking at all parts of our portfolio and identifying where we see the best long-term opportunities for not just revenue growth, but delivering margin and profit dollars and higher return on investments. So that certainly will be a lens that we'll be looking through as we work through the strategy project over the next few months.

Okay and then maybe last one from me just on Velocity maybe. I mean I know we're still - it's early, just a few quarters in, but maybe thoughts on that as you look at that for the first time here over the last two, three months, you know, where you see that now, maybe how it's performing now, but where you see that whether it's at its current size or whether it's expansion going forward?

Yes, I can tell you that the ramp up continues to progress slowly due to the market conditions and certainly the February weather event in Texas didn't help with respect to that. It's still not at the breakeven levels that we were aiming for and we're continuing to see some operational challenges as those volumes still stay below our initial targets. What I will tell you is we've learned a lot about that business and the operation itself over the last several months and we're going to use those learnings to further assess how this business can be successful going forward. Longer-term, that will be part of that evaluation as we go through our strategic planning process as well, ensure we've got the right resources and investment to support that or other parts of the business as we move ahead.

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

Great, thank you. Good morning and Ty, welcome. Look forward to working with you.

Thank you. Thank you, good morning.

Ty, I know a lot more to come on the strategic front over the coming quarters and calendar year, but would love to - you know, Apogee has sort of embarked on this initiative of focusing on sort of the non-monumental projects moving down market a little bit and love to get just your perspective on that strategy from a bigger picture level. Is it the right strategy? Does it need to be accelerated? Any comments around that?

Well, that's certainly going to be part of that effort as we're building out that strategy. So we're in a very strong position as we entered this down cycle. There's been a lot of good work and the team built on that throughout fiscal '21. So as we go through the strategic planning process, we'll be looking at all parts of the business and identifying what makes the most sense given that it's likely - some of the markets are shifting due to the down cycle. Certainly in a post-COVID world, things may look differently. We're still assessing how that might shift because this is a long-cycle business as you know, but that will inform where we direct our efforts going forward.

Okay. And then on the Services front, you talk about the quality of work entering backlog, shifts in types of services or projects you're doing. I know the backlog is down, but you're still picking up a lot of work it looks like. Love to get your perspective there just the bidding environment?

Yes, over the past two years, we built a record backlog in the Services business and it's really been a step function change from approximately $500 million in fiscal '19 to nearly $700 million at the beginning of fiscal '21. So they're executing that backlog now and that drove growth and margin expansion in fiscal '21. Just like as we look at the general market, new project activity has slowed, but the Q4 was sequentially stronger than Q3 and that business has really carved out a very solid position in the industry and we're confident that they'll continue to win our fair share of project awards even in this market downturn.

Okay. And are labor constraints an increasing challenge in that business?

So in general, this is Nisheet, in general, the market is constrained in all parts of the business with regards to labor. We have been able to find the right pockets of labor pools in most of our construction sites. We do see challenges with the labor, but it's not something which is unsurmountable. There might be some pockets where we have to work harder to get workforce and I do not see that. Our team in Services segment has done a fabulous job on project excellence as we call it and that means pulling all the resources much ahead with a stronger [technical difficulty]. So I don't see that as a challenge for us.

Yes and I think as you know, there is - yes, this is Ty, there's a union labor component there and we've got a really strong relationship with the unions in that business and also as Nisheet commented, I've been impressed with what I've seen with that team and what they've built around process and that has allowed them to grow that business effectively and improve their margins due to that process work. So people are still a very important component of that business, but they've strengthened their execution around some really great processes and how they not just manage projects after they win them, but even how they target the projects they go after.

Right and Nisheet, you talked about some of the inflationary pressures. I assume that's aluminum, glass, maybe some other elements to that. Is the market in a - are you in a position to pass that through in the coming quarters?

Yes, great question. So we have short lead time and long lead time projects, right? So for the shorter lead times, we use our procurement organization to continuously challenge our cost and offset those pressures. For longer lead time projects, we definitely have an opportunity to pass on the cost to our customers as we continue to bid and realign cost structures based on the latest cost available. So I see a very good kind of mix here and we are able to offset most of the cost challenges in the next one year.

Okay. And in the past I think you guys have provided a composition of backlog or revenue by market segment, you know, office, hospitality, multifamily. Can you provide that today?

Well, we look at our kind of high-rise, mid-size, and low-rise buildings and we have been focusing on diversifying our portfolio as we have mentioned earlier. We have seen continuous kind of reduction in demand for high-rise, especially in the new world. We are, let's say, majority of our business still has a commercial focus to it and we are continuing to look at our enterprise strategy to see how we can evolve towards a more diversified portfolio going forward.

Yes, I would add to that, the team has done a nice job of starting to diversify that mix. That's something that we actually are working to amplify that effort. And again, the strategy is going to inform how we redirect some of that effort to look at that as we go forward and assess the future of the market.

Our next question comes from the line of Julio Romero with Sidoti & Company. Your line is open.

So Ty, you talked about using the current downturn as a catalyst for change and you're still crafting your strategic planning process, but I was hoping you could speak to one market that is currently shifting, which is that transition of office from high-rise to more satellite offices and maybe if you could speak to the potential solutions that are needed within that space?

Yes, it's a great question and I would start by saying that long-term, we still believe that the office is going to be an important part of how work gets done, how organizations build strong cultures, but it's likely some things are going to change and I would tell you that our view is it's too early to tell exactly how that will shift. There's a lot of speculation. I'm sure you're reading things as I am and talking to customers and as we talk to other companies as well. So we're monitoring how that's going to shift over time. This is a long-cycle business, so some of those shifts will take a while to really become visible, but that's part of why that enterprise strategy work is so important because that's going to inform us as we look at how that might change and really looking at different potential option paths that it might go down and how we position ourselves to take advantage of whatever that shift is.

I just want to add, in terms of the satellite offices, the diversification of portfolio that we have done already is going to help us play in the mid-size and low-rise buildings. So we believe we still have a strong potential to play in the market in the short-term while we define our long-term strategy.

Got it. I was hoping to pick your brain on the overall view of the renovation business. I know in the past, you talked about opportunities for geographic expansion within that. Ty, I was just hoping to get your view on big picture, your long-term view of the renovation business?

Yes, I mean I think that has been a nice pocket for us and for the business and it's an area that we're still working and driving some revenue growth in that space. Like everything else, we'll look at that and if there is something we could do different in assessing that in that strategy work and how we see that maybe playing out in some of the market shifts that are likely to happen in that post-COVID environment.

Yes and if I can add to that, this renovation group that we have created in Apogee has got to play in the short-term as buildings will be redesigned with regards to COVID needs and so on. We definitely see a play for us in the renovation market. The enterprise strategy will help us define what that play is going to look like.

Okay and maybe just last one here would be, Nisheet, that $20 million of incremental savings that you expect in '22 - in fiscal '22. Could you maybe break out how much of that would be procurement and how much of that would be on Framing Systems' improvements?

Yes, roughly half and half would be a good estimate for that Julio. I would say - yes, the AFS journey is going to continue. They've done some phenomenal job in fiscal '21 in taking out costs. The impact is going to be reflective in fiscal '22 and procurement work is going to be challenged a little bit with the raw material cost increases as a headwind, but they are working really hard to offset most of those challenges, but roughly half and half would be a good estimate.

Our next question comes from the line of John Bratz with Kansas City Capital. Your line is open.

Good morning, Ty, Nisheet and welcome to Apogee, Ty.

Thank you. Thank you. Good morning as well.

Looking at your near-term priorities, is the emphasis going to be - in terms of operational changes and operational improvements, is the focus going to be on the Architectural Framing industry Framing segment excuse me. Is that where you're really going to emphasize and make some additional changes and so on?

Well, I think again that strategy work is going to help direct that, but in general, if you look at, I would say, both Framing and Glass, the team showed as they stepped into the challenges in fiscal '21 what they could really do when they were faced with that challenge in terms of cost management, even the working capital management, which was a step change and still able to keep the business, serving customers as we went through that process. So I'm looking at that as that's an opportunity that we've identified now that we certainly can do more there, specifically in the SG&A cost construct as well as our COGS effort. So looking at building on that foundation in fiscal '21 and continuing to keep that focus as we go through fiscal '22. And some of that's going to take investment as well. That's part of the transformation investment that Nisheet identified in his comments that we're looking at doing. We're putting some investment in as well so that we can sustain some of those improvements and also give us the ability to target other areas and to drive additional improvements as we move forward.

Is there anything specifically you can talk about with regards to EFCO down here in Missouri. Obviously, that has been an issue here for the last couple of years, but how are they doing? What kind of improvement do you see out of EFCO and where maybe you stand in terms of getting EFCO back to where it should be?

Sure, so, as you know, we do not comment much on our business units, specifically in an earnings release. We focus on segments. What I can tell you is that AFS segment has got EFCO as a business within it and they are continuing to make progress as one integrated offering of Framing segment. EFCO is a part of that business and will continue to drive improvements in that business along with the AFS integrated strategy.

Okay, okay, one last question. I think one of the recurring themes we may be hearing in the first quarter conference calls are supply chain issues beyond just cost increases and so on, but have you seen any freight issues or availability of freight, availability of raw material, anything like that that's impacted your business?

So we have seen limited disruptions at this point and the good news is that we are a North America centric supply chain. So we don't see that much of an impact coming from raw materials coming from other parts of the world. The market remains tight in terms of supply chain and we will continue to evaluate what improvements are needed in supply chain, but I don't see that as a significant challenge for Apogee at this stage.

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

Thank you. I had a group of questions. First of all, which one of the Framing businesses had the impairments?

Yes, sure, I can take that one. We went through a normal impairment testing exercise at the end of the year. We evaluated all of our businesses as part of our annual exercise and two businesses that stood out were EFCO and Sotawall where continued market pressures and also the way the business projections are for the next years have led to that impairment.

Great, thank you, Nisheet. And then not to be too negative, but playing off of your comments about the future downturn or as a downturn that we're in the middle of, when would you expect the Services business to see revenues turn down?

I would say that - as you can see from our backlog, our backlog in Services business is starting to reduce. We do not do long-term projections or guidance here, but I would see fiscal '23 and '24 to see some pressure as backlog are starting to go down now. I'm confident that the team is working really hard and they are booking a lot of orders as you can see. In quarter three, they booked $7 million of orders. In quarter four, they booked $52 million of orders. So they are working hard against end markets stream so to speak and I believe - but we will see some headwinds in fiscal '23 and '24 on revenue.

Yes and I would just add into that, Bill, that's a business that continues to perform very strong. So they've got an opportunity here to continue to build out that business and backlog as we go into fiscal '23. Even though that's a longer cycle business for us, if you would look at the third-party data, which probably indicate we believe that they are outperforming the market. In other words, taking share. So that's an opportunity for them to continue on that. So at this stage, I don't know that we can say we would expect a downturn in fiscal '23. We need to give that team time to continue to execute and perform the way they have been.

Great, that's helpful. And then relative to geographic behavior, do you see a difference in activity levels or anticipated activity levels in the different regions of the country or is it pretty similar?

Yes, I would say that overall we're seeing slowness across the architectural markets in general. So there is more softness in larger projects and then the small project business in Framing has shown some more resiliency and so we'll see how that improves, but that's been kind of general across the board as we've seen it.

Thank you. And my last question is, given the dynamics that you see today, what is your expectations on when the high velocity glass plant can reach breakeven?

Yes, well, as I commented earlier, that's an area that we're assessing as part of our strategy work. They've had some continued challenges in getting to the breakeven volumes that we've talked about in past earnings calls. So the February weather events in Texas is unfortunate as that was affecting people. We have employees obviously there and customers and as they worked through that, that certainly set them back a bit in terms of their volume efforts. So we're assessing that now as we go forward and we're including a lens on that as we go through our strategic work to assess what is the most realistic revenue that we can hit to get to the right cost structure to make sure that that business is successful as we go forward.

Thank you. I'm not showing any further questions. I would now like to turn the call back over to Ty Silberhorn for closing remarks.

Well, I'd like to thank everyone for joining us today. I can tell you that we're very excited about the journey that we're beginning on in this fiscal year and I look forward to giving you additional updates in our next earnings call. Have a great rest of your day. Thank you.

Ladies and gentlemen, this concludes today’s conference call. Thank you for your participation. You may now disconnect.