Apogee Enterprises, Inc. (APOG) Q2 2022 Earnings Report, Transcript and Summary

Good day and thank you for standing by. Welcome to the Second Quarter 2022 Apogee Enterprises, Inc. Earnings Conference Call. [Operator Instructions] I would now like to hand the conference over to your host today, Jeff Huebschen. Please.

Thank you, Michelle. Good morning and welcome to Apogee Enterprises fiscal 2022 second 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. These 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 measures and a reconciliation to the nearest GAAP measures are provided in the earnings release we issued this morning. I would like to remind everyone that our call will contain certain forward-looking statements. These reflect management’s expectations 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 will turn the call over to you, Ty.

Thanks, Jeff and thank you everyone for joining us today. This morning, I will discuss our second quarter results and the trends we are seeing in our business, share some insights about the rest of the fiscal year and provide an update on our strategy work. Then, Nisheet will give more details on the quarter and our outlook. After that, we will take your questions. So, let’s start with the quarter results highlighted on Page 4 of our slide deck. I am very proud of our team’s efforts this quarter. We are managing a lot of moving pieces, but our team has executed well and we have maintained positive momentum in our business even in a very difficult operating environment. Adjusted margins and earnings improved sequentially compared to the first quarter. This was led by large-scale optical and architectural services. LSO continued its strong recovery, bouncing back from the COVID-related disruptions that impacted it last year. And Architectural Services delivered double-digit growth in both revenue and operating income. Architectural Services also increased its backlog this quarter, an encouraging sign as this is the first backlog growth in that segment in the past year. Cash flow continues to be very strong. We had $48 million of cash from operations in the quarter, improving our already healthy financial position and we returned cash to shareholders. We did face several headwinds that impacted our results this quarter. As with many companies, cost inflation is a significant issue. Input costs are increasing faster than we can mitigate their impact given the speed of raw material price increases and the cycle time of some of our businesses. For example, the price of aluminum, which is Apogee’s largest material cost category, has increased 65% in the past year. In fact, aluminum prices are up nearly 20% just since our last earnings call. We are also seeing meaningful cost increases for glass, coatings, freight, and other direct and indirect materials used in operations. We do work to mitigate some of these through hedging and contracts, but the breadth and depth of the increases have outstripped much of that. Additionally, we are experiencing some challenges in our supply chain. The market for many materials is very tight with lead times pushing out and some suppliers are reluctant to take on new business as we seek additional sources. I would like to acknowledge the efforts of our procurement team in helping the company navigate through this situation. Over the past few years, we have added new talent to build a stronger procurement organization aligned to our business segment priorities. This team is offsetting some of the inflation impact from sourcing alternatives, supplier negotiations, and driving cost savings in other categories. Even with these efforts, we were not able to fully offset increased cost of materials and freight. We are achieving meaningful progress in procurement as well as driving cost out in our operations, but this is not clearly visible in our results as inflation has outstripped these efforts at a faster rate. In addition to our procurement and cost efforts, we are taking price actions to mitigate the impact of both labor and material cost inflation. As a reminder, many of our projects have long lead times. So, there is a lag from when we take pricing actions until that impact shows up in our financial results. The impact of cost inflation is hitting us now while the full benefits from pricing will not start to show up until the fourth quarter and into next fiscal year. I’d also like to comment on our end markets. We thought this was going to be a tough year for volumes, especially in Framing Systems and Architectural Glass, and that is how things are playing out. Non-residential construction remains in a downturn. The most recent data from the Census Bureau shows that non-residential construction spending continues to trend lower. Total non-residential spending is down 11% from the pre-pandemic high. There are reasons to be optimistic about the longer-term outlook in our markets. Forward indicators like the ABI and construction starts have been positive for the past several months. These forward metrics are indicators of the direction of our business 12 to 18 months out into the future. So, it’s likely a few more quarters before we begin to see these improvements show up in our business results. Looking ahead to the rest of the year, we do not expect the challenges we faced this quarter to dissipate. We will continue to take actions to protect our margins in the near-term. This includes a continued focus on execution, closely managing our controllable costs, and price actions as appropriate and working to realize the benefits from our restructuring actions as soon as possible pulling more of these savings into our fourth quarter than originally planned. As the year plays out, we expect that these actions will offset a large portion of the headwinds we are facing. So, we remain confident in our guidance for the full year. While we work to deliver results this fiscal year, we are also positioning the company for the long-term. Our priorities for the year have not changed as shown on Page 5 of our presentation. Let me highlight a few of these. First, we will continue to focus on improving operational execution. We certainly have more work to do in this area, but I am encouraged by signs of improvement across our company. For example, our execution of the restructuring and business realignment is ahead of schedule and restructuring costs are coming in lower than originally planned. We are also seeing a solid path for productivity savings in our Owatonna glass plant. This allows us to absorb the Statesboro operations and still leave meaningful capacity to grow our glass business. Even as we work to manage costs, we continue to move forward with our enterprise transformation efforts. These are important investments that will help build a stronger foundation for profitable growth and make us a more efficient acquirer in the future. The projects we have underway will strengthen core processes and systems and provide new digital and back office capabilities across several areas, including finance, human resources, and supply chain. Finally, we continue to make substantial progress on our strategy work. Much of this work is now complete, setting a clear direction for the enterprise. As I have discussed previously, this was a rigorous process that analyzed all aspects of Apogee’s business and the markets we serve. We took a systematic outside-in approach. This included extensive input from key customers and detailed competitive benchmarking. We analyzed our portfolio and mix of products, services and capabilities to identify the best avenues for future growth, and we evaluated how we compete to ensure we have the right operating models to deliver consistent, profitable growth. From this work, we are building a detailed strategic roadmap to move Apogee forward. We still have work to do in building out detailed specifics of our plans, but I’d like to share a few of the key elements that are guiding the strategy. These are outlined on Page 6 in our presentation. We are positioning to become the economic leader in the markets we serve. This means clearly understanding our target markets and where we see the most opportunity to drive value for customers through differentiated products and services. We are aligning our businesses to have clear go-to-market strategies, managing similar products and services together in a way that best meets the needs of our customers. And we will have a relentless focus on operational execution, driving productivity improvements to bring more value to customers, and to improve our own profitability. Going forward, we will emphasize return on invested capital as a key metric to guide our investment decisions. This focus on ROIC will inform how we direct our capital allocation and how we manage our overall portfolio of products and services. To enable future profitable growth, we are building centers of excellence for core processes and capabilities. This will allow us to better leverage scale and will provide a strong backbone to support our businesses. The enterprise transformation initiatives we have underway are important parts of this effort. Finally, we are adding key talent, processes and tools to support our transformation efforts. The actions we announced in August are initial steps in executing our strategy. We are refocusing Architectural Glass to emphasize segments of the market where we see the most opportunity to provide differentiation and drive value. The steps we are taking will also accelerate improvements in the glass segment’s cost structure and productivity. We are realigning Framing Systems to bring more clarity in a go-to-market approach and increased focus on our target markets. The changes in Framing Systems will also improve execution and importantly reduce overall cost to raise our margin levels. Finally, we are moving the Sotawall business into architectural services to create a unified market offering for larger custom facade projects. These actions begin our journey to accelerate profitable growth through focus, simplification and improved execution. We plan to share more details of our strategy in our upcoming Investor Day. Invitations for the Investor Day are expected to go out in the next couple of weeks. With that, let me turn it over to Nisheet to provide more details on the quarter and our outlook.

Thank you, Ty and good morning everyone. As Ty mentioned, we are proud of our team’s efforts this quarter, maintaining the positive momentum in our business despite the significant challenges we faced. Let me start with consolidated results on Page 7 of our earnings presentation. Total revenue grew by 2%. This was led by double-digit growth in both Architectural Services and LSO segment. As expected, volumes were lower in Architectural Glass and Framing Systems. This was due to continued market softness and some supply chain challenges. The quarter included $20.8 million of pre-tax restructuring costs. These are related to various actions we announced on August 11. $18.5 million of the restructuring costs were included in the cost of sales line on our income statement. This reduced our reported gross margin in the quarter by 565 basis points. $2.3 million of the restructuring costs were included in SG&A. When we announced the restructuring, we estimated total costs between $30 million and $35 million. As expected, most of this was incurred in the second quarter. We continue to expect that restructuring will be largely complete by the first quarter of fiscal ‘23. Based on our progress to-date, we now expect total restructuring costs to be lower than initially estimated. We expect remaining pre-tax restructuring costs of approximately $5 million to be incurred over the next two quarters. Excluding the restructuring cost, adjusted operating income was $17.7 million. This was down from $25.5 million in the last year’s second quarter. The year-over-year decline was primarily driven by input cost inflation, which was a $20 million headwind in the quarter and higher labor costs, mainly resulting from the reversal of temporary cost actions we had in place last year. Additionally, we had approximately $3.5 million of operating costs related to enterprise transformation initiatives. And finally, we had increased cost of healthcare insurance. These cost increases were partially offset by improved pricing, productivity and cost structure improvements and benefits from our procurement savings initiatives. While our adjusted operating margin of 5.4% was down year-over-year, margins did improve sequentially by 50 basis points compared to 4.9% in the first quarter. This was primarily driven by stronger performance in Architectural Services. Our results this quarter also benefited from reduced net interest expense driven by lower debt balances and a lower share count resulting from stock buybacks in the first half of the year. We reported a net loss of $0.08 per share. This included the restructuring costs of $20.8 million. Without this restructuring impact, adjusted earnings came in at $0.53 per diluted share. Similar to our margins, adjusted EPS improved sequentially, increasing by 26% compared to the first quarter. Let’s turn to segment results, which are on Slide 8. Starting with Architectural Framing Systems, revenue of $150 million was slightly lower than the prior year. This was primarily driven by lower volumes and supply chain challenges, partially offset by improved pricing. Framing Systems reserves this quarter included $2 million of restructuring costs. Excluding the restructuring, adjusted operating margin was 6.9% that was lower than the prior year, driven by cost inflation and lower volume, partially offset by improved pricing and productivity gains resulting from prior restructuring actions. Sequentially, margins improved from 5.3% to 6.9%. Moving to Architectural Glass segment, revenue was down 8%. As expected, this was driven by lower volumes. The Glass segment’s results included $17.4 million of restructuring costs. This was primarily for asset impairment related to closure of Velocity business, along with employee severance costs. Excluding the restructuring costs, adjusted operating margins were slightly above breakeven. Margins were impacted by higher cost of glass, lumber and other materials along with higher freight and labor costs. The higher costs were primarily offset by improved sales mix and increased productivity in our Owatonna, Minnesota glass facility. The Glass segment, along with framing systems is where we see the most opportunity for long-term margin improvement. Most of the restructuring actions announced in August are focused on Framing and Glass segments. We now expect to see profitability improvements from these actions starting in the fourth quarter. Refocusing the business and differentiated high value-add products should be also contributing to long-term margin improvements. We are renewing our focus on lean and continuous improvement to drive productivity gains. In Architectural Services, revenue grew 13% to $83 million as we continue to execute projects in backlog. Operating income grew 10% to $7.2 million and operating margins came in at 8.7%. The Services segment continues to have strong project execution. While margins were down slightly compared to the prior year, this quarter was a nice improvement compared to the first quarter. We remain confident in Services overall execution and outlook for the full year. We’re also encouraged by the improving order trends in our Architectural Services net order flow has increased each of the last three quarters. And as Ty mentioned, backlog grew this quarter to $572 million. Turning to Large Scale Optical, LSO continued to recover from last year’s COVID-related shutdowns. Revenue of $24 million grew 40% compared to last year’s second quarter. Demand has returned to normal and our sales mix included more premium products, LSO is also returned to a more normal level of profitability. Operating income was $5.5 million with operating margin of 23.3%. And finally, our corporate costs increased this quarter to $7.1 million. This was primarily driven by operating expenses related to transformation projects and increased healthcare costs that I mentioned earlier. The corporate line has also included $1.4 million of restructuring costs. We expect corporate expenses will remain above last year’s level throughout the rest of the fiscal year. Turning to Page 9, our cash flow and balance sheet remains strong. Cash flow from operations in the quarter was $48 million. This brings year-to-date cash flow to $55 million. These are strong results and cash flow is above where it typically has been through the first half of the fiscal year. Cash flow is lower than the last year, which was unusually strong. As you remember, last year, we benefited from reduced working capital and temporary cost actions related to COVID. Year-to-date CapEx is $10.1 million below last year’s level. We expect capital spending to ramp up in the second half of the fiscal year as we see more investment related to transformation initiatives. Based on year-to-date spending, we now expect full year CapEx of approximately $35 million, down from our previous estimate of $45 million. We continue to return cash to shareholders. Year-to-date, we have returned over $32 million from share buyback and dividends that is more than double the level in last year’s first half. Our balance sheet remains very strong. Net debt is down to $102 million. We have no significant debt maturities until June of 2024, and we have no borrowings in our $235 million revolving credit facility. This strong vision provides significant flexibility as we start to execute on our new enterprise strategy. Now, turning to our outlook for the rest of fiscal 2022 which is on Page 10 of our presentation, as Ty mentioned, we are reiterating our full year guidance based on an adjusted EPS basis in a range of $2.2 to $2.4 [ph]. As a reminder, this guidance excludes the expected restructuring costs. In order, we believe the headwinds we faced this quarter will persist. Input cost inflation and supply chain challenges will likely remain significant issues, especially in framing and Glass segment. We expect continued top line softness and lower volumes in framing systems in glass, particularly in the short lead-time parts of our business. We also faced a continued year-over-year headwind from the reversal of temporary cost actions that were in place last year. We are taking near-term actions to offset these headwinds. We including a continued focus on execution, closely managing controllable costs, adjusting pricing to offset inflation and working to achieve benefits from our restructuring. We expect these actions will offset much of the headwinds we are facing, which gives us confidence in our full year outlook. Our third quarter results will likely be similar to the second quarter. We expect earnings will make a larger improvement as we move into the fourth quarter when we expect to realize more of the benefits from our pricing and restructuring actions. Also as a reminder, last year’s third quarter included $7.4 million benefit in architectural glass related to new market tax credit. This benefit will not repeat in this year’s third quarter. So while our outlook remains challenging in the near-term, we are confident that our team can continue to execute to substantially offset the headwinds as we close out the fiscal year. This will put us in strong footing as we move into fiscal 2023. With that, I’ll turn it back over to Ty for some concluding remarks.

Thanks, Nisheet. As I said earlier, I am very proud of our team’s efforts this quarter. There were a lot of moving pieces, but our team was able to drive progress and sustain positive momentum in our business. We are particularly encouraged by our continued strong cash flow, which provides significant financial strength as we move forward. We expect our operating environment will remain challenging, especially through the third quarter. Our team is taking the right actions to offset these headwinds, and we see a path to improved results in the fourth quarter and as we move into next fiscal year. Most importantly, we are beginning to execute elements of our strategy to better position the company for the long-term. This remains an exciting time for Apogee. We knew this year will be challenging, and those challenges have increased given the broader economic environment. We also realized that making a major shift in strategy and implementing it would take time with fiscal ‘23 being the year we would really start to see the larger of this work. But as we’ve highlighted today, we are making progress on several fronts, and we expect that to accelerate as we close out this fiscal year. We look forward to sharing more details with you on our upcoming Investor Day. And with that, we are ready to take your questions.

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

Hey, good morning guys. Thank for taking a few questions.

Good morning.

Good morning. Maybe just start with input inflation. So you talked about a $20 million headwind. It sounds like most of that is coming from Framing and Glass. I was wondering if you could provide a little bit more detail there on the split and really trying to understand where it’s easier to raise pricing? Is it easier within the framing segment than glass or maybe just talk to that a little bit.

Sure. Good morning, Chris, this is Nisheet. So, gross inflation for the quarter is $20 million as noted. We have a lot of actions in place today on offsetting that. So, procurement savings as well as pricing has helped offset about $10 million of the $20 million, so net impact on inflation for the quarter is $10 million. And on a year-to-date basis, this number is $14 million. When you think about the split of this, I would say about 50-50 would be a fair split between the glass and framing segment on the inflation. There are lots of moving pieces within the quarter. But on a directional basis, I would say it’s a 50-50 split. As we look at the lead times of our businesses, it takes some time for us to start recovering some of the price changes we do as we are committed to a certain number of projects. So, we expect our quarter three to remain under a negative trend on inflation, but we start to see positive net inflation impacts coming through in quarter four.

Yes. Maybe, Chris, I’ll just add to that. If you think about that split in framing with respect to pricing, I mean, obviously, we’re trying to offset costs ourselves. Customers never like to see price increases even though a lot of them have become used to it, at least the first several months of this year as it was going across not just our industry but a broader economy. Framing has some shorter cycle time, so they have been taking more pricing. So they probably offset a larger chunk of that inflation. However, it’s still been a net negative for them just given the speed of the price increases and glass giving a little bit longer cycle time and how projects are quoted there’s been a bigger lag in their ability to see that pricing flow through on jobs and sales as we go forward.

Got it. Very helpful. I guess, longer term, the expectation is that you can achieve $20 million to $30 million of annualized savings by the end of fiscal ‘23. Just from a big picture perspective, can you talk about the drivers, what would be that delta between $20 million and $30 million? Where are those savings going to come from that are less certain at this point?

Sure. So, the focus on our all of our restructuring program is on Glass and Framing segment, right? So, if you think about the structural improvements we are doing, there is an SG&A piece to it, but more importantly, there is a piece on our cost of goods sold that is going to improve in both glass and framing segments. I would say if you think about the split or areas where we get a restructuring, it’s relating to people. So, as we shut down some of our facilities, we have to let people go. That would be one piece of our restructuring benefits. The second would be facility shutdowns and related optimization of cost and SG&A. Those are the two important pieces on optimizing our cost from restructuring that I can think of Ty.

Yes. No, I think that hits it well, and obviously the simplification that we’re doing in the business realignment that really impacts framing, but also moving Sotawall as we go into next fiscal year over to our architectural services. There’s some high-level savings from an SG&A perspective that will benefit from that consolidation in the larger framing segment.

Got it. Last one for me. This may be a question for your Investor Day, but maybe expectations for Glass operating margin range once restructuring is complete and non-res market is a little bit stronger?

Yes. I would say at this point, we’re not ready to give any long-term guidance with respect to margins for Apogee overall or any of the business segments. I will tell you that through the strategy work, we identified significant opportunities to improve our margins for glass and that’s really the focus and emphasis for that business right now and probably well into fiscal ‘23 that we want to refocus in parts of the market where we can differentiate ourselves more strongly, delivering more value to the customers, which in turn shows up as more value for Apogee and our shareholders with respect to margins. So, that is the focus for glass. We do see some significant upside on margin improvement for them over the next year or so.

Got it. I leave it there. Thanks guys.

Thank you.

Thanks, Chris.

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

Hey, good morning, Ty and Nisheet. Thanks for taking the questions.

Good morning.

Good morning.

So, I wanted to maybe talk a bit on the string a little bit on the Glass segment, maybe without speaking about margins, maybe more broadly if you could speak to the product focus going forward in Glass? Maybe some examples of the premium high-performance products that I think you called out in your August press release.

Yes. Let me give you some high level, and this is an area that we will go deeper into on the Investor Day. But as we looked at our position in that market, we wanted to look at where we have opportunities to leverage some of the unique capabilities we have on coatings as well as certain parts of the market, certain types of projects that we saw an opportunity where we can differentiate ourselves versus competition, especially some of the foreign competition. It’s areas that the business is selling into now and it is part of their portfolio. What we are doing is putting a stronger emphasis on that as we go forward. We also see an opportunity to bring more value into what we take to market. Some of that would be organic product innovation that we would invest in ourselves. Some of that would be through third-party partnerships where we can leverage other technologies that are out in the market and combine it with our glass offerings to in essence, raise the value of what we are selling and thereby also generate higher margins for that business.

Great. Appreciate the color there. And you spoke about adequate capacity at Owatonna to support the additional activity. Can you maybe give us a sense of what utilization rates are looking like and what you will be running at post restructuring in the Glass segment?

Sorry, we don’t really comment into that level of detail on capacity utilization. All I can say is that there is a lot of productivity work that’s happening in Owatonna right now. And we are continuing to expand our capacity just based on that productivity work. With all the kind of couple of shutdowns that we have mentioned as part of our restructuring, we still believe we have adequate capacity for the next several years to take on the market growth that’s coming up.

Okay. Fair enough. And then just last one for me, and I will pass it on, is on the services side, I think you did see some sequential backlog improvement there. Can you speak to how you see backlog for services trending for the remainder of the fiscal year?

I think as we look out for the year it was a positive sign that we saw this quarter. There is still unevenness that we expect to see in that business just as quoting activities moving around with the broader economic challenges. So, we have seen the improvement in orders and the backlog going up is a very positive thing. We are not ready to call victory that we will see that consistently as we move ahead, but we have got some very good positive signals with respect to that business moving forward.

Great. Thanks very much and I will pass it on.

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

Good morning, everyone.

Good morning.

Good morning.

So, I will just follow-up on that last question a little bit, and I know you said too early to call a little bit on services. But I mean as you look at the trends in that business, obviously, services is the one that you are doing well now, but you are going to start to feel the impact of the downturn later than the other businesses. As you get to fiscal ‘23 and clearly more optimistic about glass and framing, I mean do you feel – I mean, where does your confidence stand in terms of that services backlog, which is still very sizable kind of making up for some of that softness. So, maybe you are able to keep that business flat in ‘23 rather than some compression there?

Yes, I appreciate the question. And we are not really ready to give guidance on fiscal ‘23. What I will tell you is that given that we are just midway through this fiscal year, it’s too soon to call anyway how we would see that business performing. I have commented on previous calls that team, while they did see that downside hitting them later has been actively working to fill that gap. So, that work continues. And I think we have to give them time to continue to see that as we progress forward. We will have a little bit more insight as we get to the end of the calendar year and then certainly in our fourth quarter, we will start to have some better visibility to fiscal ‘23 for that business.

Yes. No, I can appreciate that. But it does sound like you are pleased with how services has been executing. And so just would – looking at it in that context, your – it sounds like you are optimistic that they will continue on the path that they have been on.

Yes. We have been very pleased with how that business has been performing and also how they have been working to not only deliver this year from a margin perspective after having a really great margin year last year, and as they build out fiscal ‘23. And that strength is frankly where we saw the opportunity to move Sotawall under that business because we see opportunities to leverage some of that strength within that business and raise its performance as well.

Yes, got it. Well, maybe last one for me. Just on velocity and the decision that you have talked about back in August. Maybe anything just you learned in that business, clearly, that’s not a part of the market you now want to focus on. But whether it’s operationally or market-facing what you learned in that business that maybe you can take to the rest of the Glass segment?

Yes. As we looked at that business through the strategy work, we looked at current market as well as how we saw the future market playing out. And with respect to that into the market, we saw significant pressure on margins. And so that we were not seeing the price points that was originally anticipated and therefore, not seeing the margin that we expected for that business. So, we took a forward-looking view and didn’t see that materially improving over the next few years. That said as well, what we were doing in that space, while it was taking a different approach from a technology and automation perspective. It really wasn’t a strong differentiation from the end product itself. And we saw it as being dilutive to our margins and our ROIC goals as we move forward. And that led us to the difficult decision to exit that business. We are working diligently with the team to effectively offset some of that investment through the sale of equipment as we shutdown those operations, and we are seeing some positive indications with respect to that as well.

Okay. Thank you.

Thank you.

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

Thank you. Good morning.

Good morning.

Ty or Nisheet when does the move of the Sotawall business into services become effective, just from a reporting perspective?

Sure. So, as you would have seen in the August 11th announcement, we are already working on transitioning some of the parts of the businesses. But the real transfer of business will happen from 1st of March next fiscal year. We are looking at a lot of moving pieces within the Sotawall business or our Services segment is trying to understand the key opportunities they can drive. And this year, we will be focused on understanding the business and transitioning it. So, we are looking to, let’s say, restate or recast some of our numbers and segments coming from – starting from 1st of March, next year.

Okay. Perfect. And then on services, I mean, you had good revenue growth, but the margins were a little lower. You talked about some of the change in the mix. Is that your expectation for margins in the guidance for the rest of the year for the services business, just a function of different mix versus last year?

Yes. So, I would say services business is performing really well. And there is always an element of project mix that comes along in this business. So over quarters, we can see the margins going down quarter-over-quarter, but sequentially, they are continuing to improve their margins, exceptionally strong margins in fiscal 2021, the second highest ever. It will be hard to repeat that in ‘22, but we still see strong opportunities in this business as the backlog is strong. And the team is doing a very good job in their project selection and how to select their projects. So, we continue to see good positive momentum and margin should be improving over time.

Okay. The transformation initiatives and some of the facility consolidation that’s going to come with that, are there – I guess could there be significant real estate assets that we could consider coming out of all this that might also contribute to the balance sheet here?

What we have announced in August 11th, one of the key assets that we are looking at. Beyond that, we do not see any significant opportunities on our assets for now. Of course, the strategies continue to evolve and we are understanding our different part of execution of that strategy and some of the decisions on assets may be made in course of time. But for now, whatever was announced on August 11th in terms of our Glass segment assets, those are the key assets that we are reducing.

Okay. And then I saw the revised CapEx guidance, I mean, fiscal year-to-date, you are running sort of well below that. Are there some projects you earmarked that step up that CapEx in the second half, I guess just from the run rate we have seen year-to-date?

Yes. So, if you think about the enterprise strategy work that we have done so far, we have understood where do we want to invest more and which are the areas where we want to reduce our investment. So, that’s one of the key reasons we are looking at investing differently versus what we thought was originally in our plan fir this year. And secondly, the enterprise strategy work that we are doing, we have invested some of it already. A lot of systems and backbone work that’s happening that will continue to ramp up in the second half of the year.

Yes. So, we will manage that. This is Ty, I mean, from a strategic perspective, as Nisheet said, we actually were having the team slow walk some of those planned investments until we had a better sense from the strategy work and that de-prioritized some of the things that were in queue. And we do expect a step-up in the second half. The caveat, just as we are seeing with raw materials, that’s dependent on supply. So, we know some of the work that we want to execute will have to rely on the ability to bring that equipment in and etcetera. So, that is something that we are watching as we go through the second half. But our plan is to spend to that level now as we move ahead.

Great. Thank you. Look forward to talking more and more.

Thank you.

Thanks.

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

Good morning everyone. Hi, the ABI index has been positive for the last 6 months and hopefully, that bodes well down the road. But with the cost pressures that the industry is seeing, aluminum, glass and so on. Do you see any evidence that some of these projects that maybe people, architects are discussing and so on, might they be tabled for a while to see where these costs go. Are you seeing anything such as that?

We are watching that really closely as you might imagine. It’s too soon to tell if it’s going to have a material impact on the non-resi recovery. I would say we have seen some projects pause that were ready to come out for quotes and bids. And at the same time, we saw other projects pull forward or push their schedules ahead with respect to that. So, it’s been mixed signals at this point as far as what we are seeing. Obviously, what’s happening with COVID, return to workplace with the Delta variant, any other variants that come out, that could have an impact as well in what people are deciding to do with projects. So, we continue to watch that. I would say it’s uneven, but we haven’t seen anything that’s pointing to an acceleration of the recovery or at this point, something that’s pointing to a deceleration of the recovery.

Okay, perfect. And I may have missed it, when you announced the restructuring a couple of months ago, I think you said $30 million to $35 million in costs and now it’s, what, $25 million – $20 million to $25 million or something like that. What’s the delta there and what’s the difference?

So yes, you got the numbers right. So, we had a $30 million to $35 million as initial estimate, and we are looking to spend about $20 million to $25 million now. There is a big change in the interest that was anticipated from potential buyers for some of the assets that we are selling. We have seen a good interest and therefore, we see that we don’t need to write down some of the assets and property, plant and equipment. We will continuously monitor this and provide more details in quarter three by which time we will have details on some of these transactions on selling these property, plant and equipment.

Jon, the other piece I would say is that the teams have really executed well against this plan. We put together a very detailed plan on how we would move this ahead coming out of the strategy work. And the team is executing against that extremely well to the point that we are confident we will see some of those benefits actually flow into our fourth quarter, which is a very good thing. And for us, this was an area where we looked at future going forward, if we want to get back into M&A, we are approaching some of this as integration work across the business units as mergers. Our EFCO and Wausau Window and Wall business combining is that’s our instruction to the teams and we are building out a playbook and how they are managing that so they can start to exercise that muscle, because we do intend to be an active portfolio manager, which means at some point in the future, we will be back in the market, and this is a chance for our teams to start to exercise some of that work.

Okay, alright. Thank you very much.

Thank you.

Thank you.

Thank you. And I am showing no further questions at this time. And I would like to turn the conference back over to Ty Silberhorn for any further remarks.

Well, thank you Michelle and thanks everyone for joining us today and learning how we are driving progress even in a very challenging environment. As I have said earlier, we have navigated through this difficult second quarter offsetting some of the significant cost headwinds we faced. And we are taking near-term actions to protect margins, but we see significant opportunity for long-term margin and ROIC gains. Finally, we have made progress on our strategy to work and we have done that execution. We look forward to seeing you virtually or in person at our upcoming Investor Day where we will share more on our long-term outlook and strategy. With that, thank you, have a great rest of your day and a great week.

This concludes today’s conference call. Thank you for participating. You may now disconnect.