Apogee Enterprises, Inc.

Ladies and gentlemen, thank you for standing by, and welcome to the Apogee's Fiscal 2020 Second Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. After this speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star 1 on your telephone. If you require further assistance, press star 0. I would now like to turn the conference over to your speaker today, Jeff Hipchen. Thank you. Please go ahead, sir.

Thank you. Good morning and welcome to Apogee Enterprises Fiscal 2020 Second Quarter Earnings Call. With me today are Joe Pushis, Apogee's Chief Executive Officer, and Jim Porter, Chief Financial Officer. I'd like to remind everyone that there are slides to accompany today's remarks, which are available in the investor relations section of our website. During this call, we will reference certain non-GAAP financial measures. Definitions of these non-GAAP measures and a reconciliation to the nearest GAAP measures is provided in the earnings release we issued this morning, which is also available on our website. I'd like to remind everyone that our call will contain forward-looking statements reflecting management's expectations, which are based on currently available information. Actual results may differ materially. More information about factors that could affect Apogee's business and financial results can be found in our SEC filings. And with that, I'll turn the call over to you, Joe.

All right. Thanks, Jeff. And thank you to everyone who has joined us this morning. Overall, this was another solid quarter for Apogee. We delivered on our commitments and made very good progress in a number of areas. This morning I'd like to discuss the highlights in the quarter and the trends we're seeing across our businesses, talk about the progress we're making on several key initiatives to advance our long-term strategy, and then I'll turn it over to Jim for more details on the quarter and our guidance. Regarding the second quarter, highlights and trends, let me start by saying first we made significant progress toward completing the last of the legacy We're on track with our schedule and cost estimates. We expect the building will be largely enclosed by the end of October, and as is extremely normal for large construction projects, we will have a residual activity that will stretch over the next few quarters. We're also continuing to pursue potential cost recoveries, some of which we could see later in the second half of this fiscal year. More broadly, in architectural framing systems, we are encouraged by the trend line in this segment with sequential revenue growth and margin improvement in each of the past two quarters in spite of incurring costs associated with a supply chain synergy project I'll discuss shortly. In particular, the EFCO business is starting to demonstrate its long-term potential, performing nicely in the quarter and here to date. The EFCO team has made significant progress increasing productivity, quality, controlling its cost and improving pricing. Later in my commentary, I'll speak more about some strategic moves we've made to drive further progress in margin expansion in our framing system segment. Architectural glass has delivered 13% sales growth and more than tripled Operating Income compared to last year's second quarter. While the segment certainly had a modest comparison, we're pleased with the substantial year-over-year improvement. This year-over-year margin gain would have been even better if not for the startup costs related to our architectural glass growth initiative, which reduced segment margins by about 100 basis points in this quarter. We're excited about this opportunity and I'll provide more details about this investment in a few moments. Our glass segment has also seen some negative impact from the stronger US dollar. This is something that is affecting most US manufacturing companies. Over the past year, the dollar has steadily strengthened versus other currencies. This disadvantages our US-based glass operations and increases competitive intensity particularly from European competitors. For this reason, we're reducing our full-year outlook for architectural glass and will continue to monitor changes in the competitive environment. In architectural services, while we anticipated that revenues would be lower this quarter due solely to timing of projects in the backlog, the segment performed better than we expected driven by strong project execution at the construction site. Based on year-to-date results, we're increasing our full-year outlook for architectural services. In addition, the services segment was awarded several new projects during the quarter, pushing its backlog to over $500 million. This record backlog further increases our confidence in the longer-term outlook for this segment and gives us good line of sight to revenues over the next two fiscal years. Finally, in large-scale optical, we continue to deliver strong operational performance, improving on its impressive operating margins. In particular, our team has had great success in improving our mix to higher value-added products, which has benefited both revenues and margins. So overall, a solid quarter, and we feel very confident about how we're positioned for the remainder of the year. I'll now provide my view of the end markets. Looking at the conditions in the economy and our end markets, all of you see the same headlines I see, so it's hard to argue that there is not some uncertainty in the economy. In spite of the headlines, we still see reasonably healthy bidding activity. It continues to feel like we're bumping along the top, an environment in which Apogee can continue to grow. Based on U.S. government data, while this economic expansion is the longest since World War II, it has also been the weakest of the 11 recoveries, and overall building in the non-resi sector has remained below prior recoveries. The office sector, which is most important to us, remains strong, as does health care and education, also key to our portfolio. Office vacancy rates are at decade-plus low levels. as his rental rates as they come down, or as they are rising, I apologize, and consumer spending and job growth remain reasonably strong. Bottom line is that the non-resi market appears to remain balanced. As the U.S. economy continues to migrate from manufacturing to services, that mix works in our favor. Looking back at our company, the project wins we've had in architectural services as well as our pipeline reinforce our confidence and validate that aspects of the commercial construction market are not in decline. And I expect we could see further backlog growth in services in the third quarter. As I mentioned earlier, our biggest economic concern right now is the impact of the stronger U.S. dollar, which we continue to monitor. Looking at our strategy and initiatives to drive growth and margin expansion, Thank you for joining us. both within each of our segments and across the company. We've expanded the growth opportunities available to the company through new product innovation and geographic expansion, and we've improved the efficiency and productivity of our operations. I'm confident this strategy is still the right direction for Apogee. Over the past several quarters, we've had some near-term challenges, most of which are behind us. But throughout this time, we have not been sitting still. We've been moving forward with a number of initiatives to advance our strategy. Let me provide some detail on these. First, we continue to believe our framing system segment has the largest opportunities for long-term growth and margin expansion, as well as stability throughout an economic cycle. We've had success and we are accelerating our efforts. Toward that end, we recently created and appointed a new leadership team For the first time, we'll have combined P&L responsibility for our entire framing system segment, which is previously operating as six independent businesses. This new leadership team, under the command of a proven P&L leader that I brought into the company a year and a half ago, is focused on accelerating our progress by increasing integration and driving synergies across all of our framing systems businesses. For example, during the quarter, we took initial steps to increase supply chain integration and optimize our facility footprint by closing a manufacturing facility and shifting production to other Apogee locations. Additionally, in framing systems, we completed a significant facility investment at our main EFCO Operations Center this quarter, designed to streamline the processes for handling and shipping finished goods to enable further shop floor efficiency improvements. This investment is already having a positive impact on EFCO's productivity, quality, and margins. The past two quarters, we've mentioned a growth initiative in our architectural glass segment that we would like to provide some additional details on today. We've invested in a new facility located in Texas, which we will expect to be operational in our fiscal third quarter. This facility will be focused on the short lead time segment of the architectural glass market. While our Virocon glass business is the established leader in mid and large size projects, this facility marks our entrance into a portion of the market in which Apogee has not historically participated. As short lead time, smaller projects comprise the largest sub-segment of the overall Thank you. Thank you. from the most cyclical large project segment of the non-resi construction market. Lastly, we've launched an initiative to look at opportunities for material procurement savings across all of Apogee. Historically, our purchasing has been mostly decentralized across our nine individual operating units. We are analyzing all categories of spend for opportunities to leverage our scale and drive synergies in our supply chain. We've engaged a leading advisory firm to add expertise and help accelerate these efforts. We're still in the early stages of this initiative, but believe the opportunity will have meaningful impact on our profitability in fiscal 21 and beyond. We'll have more to say about this in the future quarters. We have an exciting set of opportunities ahead of us, most of which are largely in our own control. which gives us confidence in our plan to deliver continued earnings growth over the next several years. With that, I'll pass it over to Jim who will provide more details on the quarter and our outlook. And before we take questions, I'll return with a few additional comments. Jim?