Apogee Enterprises, Inc.

Ladies and gentlemen, thank you for standing by, and welcome to the Q4 2021 Apple G Enterprise, Inc. Earnings Conference Call. At this time, all participants are on the listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during this session, you will need to press star then one on your telephone. If you require any further assistance, please press star then zero. I would now like to hand the conference over to your speaker for today. Mr. Jeff Hibson, you may begin.

Thank you, Tawanda. Good morning and welcome to Apogee Enterprises' fiscal 2021 fourth quarter earnings call. With me today are Ty Silverhorn, Apogee's chief executive officer, and Nishit 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'd also 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 Pushus, for his leadership of Apogee over the past decade. as we wish them 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 Apigee has tremendous long-term potential and an opportunity to build on its 70-plus year history. Now, prior to joining Apigee, 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 Apigee. I saw a company with a decades-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 Apigee 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 our customers, shareholders, and employees as we position for stronger, more profitable, and sustainable growth. Let's now turn to our results for fiscal year 2021, which are summarized on page four of our presentation. There's no question this was a challenging year for our business and for the broader non-residential construction industry. However, Apogee's team rose to the challenge. Protecting the health and safety of our employees was a focus from the outset of the pandemic and remains our number one priority. We adapted our business operations so we could continue to serve customers while keeping our employees safe. We paid down debt and strengthened our financial position, giving us more flexibility going forward. And we took short-term cost actions, starting the long-term work to improve our overall cost structure, which allowed us to deliver solid earnings and cash flow despite significant revenue declines. I want to acknowledge the efforts of all our employees in helping the company manage through the past year. We intend to build on that foundation of work as we start our new fiscal year. Now, looking ahead to fiscal 22, the data suggests that non-residential construction has entered a down cycle. It's unclear at this point how long this will last and what the rebound will look like, although it's likely to be different than past cycles, especially in a post-COVID environment. What I can tell you is that we will not be content to just weather through this downturn in period of uncertainty. We are using it, as we have the pandemic, as a catalyst to make bigger and accelerated changes to transform the company, positioning us for a brighter future. Against that backdrop, let me discuss our priorities for the new fiscal year, which are outlined on page five of our presentation. Building on the work we began in fiscal 21, we will continue to drive near-term cost and operational improvements that protect our bottom line while also taking actions to strengthen the company's long-term position for growth. This begins with a focus on our people. We will continue to prioritize workplace health and safety, and we'll emphasize talent management and development, critical enablers to everything else we hope to accomplish. Next, we're working to drive stronger operational execution with a higher level of rigor and urgency on a vital few set of priorities. This will have some near-term impact but larger long-term benefits, enabling us to drive higher returns on invested capital even if revenues do not bounce back quickly and strengthening our leverage when they do come back. Third, we will accelerate our efforts to transform the enterprise. This means continuing to build out a more competitive cost structure challenging ourselves to rethink how we can better manage SG&A and drive to lower costs of goods sold through efficiencies, cost out, and stronger portfolio management. We'll also begin to make foundational investments to strengthen core processes, systems, and develop new digital and back office capabilities. This is critical work to enable our future transformation, sustain the gains we make in margin improvements, and make us a more effective acquirer in the future. Finally, we will embark on a new enterprise strategy to position the company for long-term sustainable growth. We'll utilize market insights to inform how we shift resources and capital across our businesses, focusing on products, services, and end markets where we can bring more differentiation, more value, better margins, and grow faster than the market. Our goal will be to generate improved return on investment, which means we must deliver stronger profit dollars and be more efficient in how we use our capital. To drive this home internally, we are shifting the focus and measurement for our leadership team to delivering stronger returns on invested capital long-term and EBIT dollar growth in the near term. Now, I know you want to hear the specific details of what this new strategy will look like, and so does the rest of the Apogee team. At this point, we are still very early in the process. This is an important effort, and we will be thorough and thoughtful to make sure we get it right. It's likely going to take much of this calendar year to fully build out, but we will provide updates in the coming quarters. I'm excited about the coming year and the long-term opportunities we have ahead of us, and Apigee's entire leadership team is focused on building a more successful future for our company, our customers, employees, and shareholders. Now let me turn it over to Nishit to provide comments on the quarter and our fiscal year 22 outlook.

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 Apigee's leadership team and employees as we continue to transform Apigee's business and strengthen our company's position. Let me start with consolidated results, which are on page six 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 Architectural Billing 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%, 190 basis point improvement compared to last year's fourth quarter as our savings initiative and improved execution offset the impact of lower revenue. I want to thank the entire Apogee team for their efforts to deliver these profitability improvements despite the continued challenges related to COVID and our end markets. Adjusted EBITDA improved to $36.2 million compared to $29.9 million in the last year's fourth quarter, again reflecting the favorable impact of our short- and long-term cost actions and improved execution, which offset the impact of lower revenue. Net interest expense was $1.5 million lower than last year's fourth quarter, due to lower debt balance and favorable one-time settlement. Our diluted share count decreased to 26 million, reflecting our share repurchases over the past year. Putting it all together, we had a gap loss of $1.65 per share in the quarter, excluding the impact of impairment and restructuring. Adjusted EPS grew by 26% to 63 cents per diluted share. Now turning to segment results on slide seven. Architectural framing systems continue to see lower order volumes for its short lead time products, as well as customer-driven project delays, which led to a 14% revenue decline in the quarter and a 17% decline for the full year. Fourth quarter adjusted operating margin was 2.7%, 140 basis points better than last year's fourth quarter, as cost actions and improved execution offset the lower volumes. Framing systems backlog increased slightly to $411 million, reflecting project wins in the longer lead time parts of framing systems, as well as slower-than-expected conversion of backlog into revenue due to project delays. Architecture glass revenue was $82 million compared to $98 million in the last year's fourth quarter, Like framing systems, revenue was impacted by project delays and lower order volume. Architectural glass adjusted operating margin was 4.4%, a 50 basis point improvement compared to last year, with improved factory productivity in our core glass operations, helping to offset the impact of lower volumes. Architectural services continued its strong performance, delivering a double-digit top and bottom line growth. Revenue increased 12% to $82 million as the segment successfully executed the project in a substantial backlog. Services operating income grew 26% to $10.7 million and margin improved to 13.1%, a 150 basis point improvement compared to last year, driven by volume leverage and continued strong project execution. Services backlog at the end of the fourth quarter was $571 million compared to $597 million in the last quarter. As a reminder, our services business had considerable success over the past two years, building a record backlog as we entered fiscal 21. Services is now executing this backlog, which led to growth and improved profitability this year, despite the difficult end market environment. Our services business is a recognized leader in its industry, and we are confident we will win our share of new projects in a down market. This is what we saw in the fourth quarter as we booked $52 million of new orders. Longer term, we are focused on further strengthening our capabilities so this business can continue to deliver solid financial performance. Large-scale optical has fully recovered from its COVID-related shutdown earlier in the fiscal year, returning to its usual levels of sales and profitability. Revenue was basically flat compared to the prior year at $22 million with impressive operating margins of 28.1%. Margins were down compared to an exceptionally strong 33% in last year's fourth quarter due to higher manufacturing costs and increased lease expense following the sale and leaseback transaction we completed in the last quarter. There were some moving pieces in the corporate and other line. On an adjusted basis, corporate costs were 1.8 million lower than Q4 last year, primarily due to lower advisory and legal expenses. I would like to provide some more details about Apogee's cost-saving initiatives, which are on page eight of our presentation. We achieved our goal of more than $40 million of cost savings in fiscal 21, which helped sustain margins and earnings despite the revenue decline. Roughly half of the savings were tied to temporary cost actions we took in response to COVID. All of those cost actions are now reversed and will not repeat in the next fiscal year. The other part of savings came from procurement initiatives and efforts to improve framing systems cost structure. These savings are all sustainable. We will build on this progress and expect to deliver approximately $20 million of incremental savings in fiscal 22, Offsetting the reversal of temporary COVID-related cost actions, the restructuring actions we took this quarter will help enable these cost reductions. We also began work to achieve additional $10 to $20 million of fixed cost savings that we identified in the third quarter. We expect some limited benefit of these actions in fiscal 22, with balance of these savings coming in fiscal 23. A continued effort to build a more competitive cost structure will be a key element of our strategy going forward. To track our progress, we expect to see the benefits of cost actions contribute to increase operating profit dollars and improve returns on invested capital. Going forward, these are the key metrics that we will be using to measure our progress. Turning to slide 9, the fourth quarter capped an exceptionally strong year for cash flow. we generated record full-year cash from operations up 32% compared to last year, primarily driven by working capital management. Full-year capital expenditures were $26 million, down considerably from $51 million in the fiscal year 20, reflecting our decisions earlier in the year to scale back capital spending in response to the uncertainty caused by COVID. With increased cash from operations and reduced capex, We achieved record free cash flow of $116 million, more than double last year's level. We used this cash to strengthen our balance sheet. We paid down $53 million of debt during the year. We also increased our cash and cash equivalents to $47 million, bringing our net debt to less than one times adjusted EBITDA. This compares to a net debt of EBITDA ratio of 1.5 times at the end of last fiscal year. We also returned $52.5 million of cash to our shareholders through dividends and share repurchases. During the year, we repurchased 1.2 million shares of our stock, and in the fourth quarter, we announced a 7% increase in our dividend. We ended the fiscal year in a very strong financial position with reduced leverage, no significant debt maturities until 2024, and no outstanding borrowings in our $235 million revolver. This provides flexibility to invest in our business and continue to return cash to our shareholders. Finally, I would like to comment on our outlook for fiscal 22, which is on page 10 of our presentation. While we see continued uncertainty in our end markets, we wanted to provide some guidance for new fiscal year. We expect earnings in the range of $2.10 to $2.35 per share. This range is based on several assumptions. We expect another down year for non-residential construction market in North America, which is mainly felt in architectural glass and the short lead time parts of framing systems. Architectural services is positioned for growth in fiscal 22, executing on projects from its backlog, and we assume large-scale optical will return to pre-pandemic levels of demand. We will continue to improve our cost structure and strengthen execution. However, the lower demand in architectural framing systems and glass will put pressure on operating margins, particularly in the glass segment, which has a relatively higher fixed cost base. I would like to remind everyone that architectural glass benefits from a $7.4 million new market tax traded in fiscal 2021, which will not repeat in the new fiscal year. We will also expect some raw material cost inflation, primarily in framing and glass segments. We will work to minimize the impact of these cost increases on our business. As Ty mentioned, we plan to make investments during the year to better position the company for the future. This includes spending on our enterprise strategy project, as well as systems and tools to improve core business processes. We expect $7 to $10 million of operating costs related to these initiatives in fiscal 2022, which is included in our full-year guidance range. We are planning for capital expenditures of approximately $45 million, which will include approximately $7 million of capital for the transformation investment, as well as normal maintenance and safety-related spending. While we are not providing quarterly guidance, We expect earnings to flow through the year similar to what we have seen in the past years, with first quarter typically having the lowest revenue in earnings of the year, further compounded by continued softness in our end markets. As a reminder, there is always some variability in our quarter-to-quarter reserves driven by timing of projects and orders. I am proud of our team and the reserves we have delivered in fourth quarter and full year. We made significant progress lowering our costs and driving improved execution across our business. We entered the new year in a strong financial position following a record cash flow in fiscal 21. I look forward to working together with Ty and the rest of our leadership team to build on this progress and position the company for more success in the future. With that, I'll turn it back over to Ty for some concluding remarks.

Thanks, Nishit. Apigee'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.

Thank you. Ladies and gentlemen, as a reminder to ask the question, you will need to press star then one on your telephone. To withdraw your question, press the pound key. Again, that's star one to ask the question. Please stand by while we compile the Q&A roster. Our first question comes from the line of Chris Moore with CJS Securities. Your line is open.

Hey, good morning, guys. Thanks for taking a few questions. Good morning. Good morning. Good morning, Chris. Good morning. 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 are obviously fairly strong at this point in time. You know, glass and short lead framing are good. or softer. Does that imply that services will likely lag a bit when framing and glass do pick up?

Yeah, I would say that projects in the backlog right now in our pipeline are generally moving forward. You know, the services business has built a really strong backlog, and they're 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 or is there also some lag likely there?

Yeah, so there's 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. Yeah, I was just trying to understand, you know, kind of, Obviously, now the shorter lead time stuff is definitely being impacted. I was trying to look at it a little bit further in terms of that and glass. I mean, glass historically has lagged the cycle, correct? Because that's kind of the last thing that goes into the buildings.

That's right. Glass has usually lagged the cycle. We've 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-saving side, so it sounds like there's an additional, you know, $10 million to $20 million that you're targeting on the SG&A. Five of that happens in 2022. So that's, you know, kind of somewhere between $5 million and $15 million additional cost savings in 2023. Will additional investment be required in 2023 to make that happen?

We are continuously evaluating the investments needed. Right now we know we're going to be investing in fiscal 2022 of the $7 million to $10 million we mentioned. We'll evaluate the benefits and returns and make decisions on fiscal 2023 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 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 materials. We'll continue to focus on them, and we'll 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.

All right, I appreciate it. I'll jump back in line. Thanks, guys. Thank you.

Thank you. Our next question comes from the line of Eric Stein with Craig Hallam. Your line is open.

Good morning, everyone. Good morning. Hey, so I just want to kind of come back to the first question. or the previous questions, just, you know, it makes sense in fiscal 22, you know, the cautious stance given that, I mean, that really reflects the bookings environment over the last 12 months since the pandemic started. But, you know, 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, you know, maybe, you know, Anything you can talk about just beyond the near term? I mean, are there reasons for optimism as you look to fiscal 23? You know, just how do you think of the business in that context?

Yeah, this is Ty. You know, 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 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.

Yep, understood. You know, 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, you know, want to stick to your margin targets. and that sort of thing. So, I mean, maybe just some longer term, whether it's, you know, fiscal 23 or just even beyond that, where do you think services can go?

Yeah, I would say, you know, 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 investment. So that certainly will be a lens that we'll be looking through as we work through this strategy project over the next few months.

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

Yeah, 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, you know, didn't help with respect to that. It's still not at the break-even 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'll 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. Got it. Thanks a lot.

Thank you. Our next question comes from the line of Brent Thalman with DA Davidson. Your line is open.

Great. Thank you. Good morning and 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, you know, over the coming quarters and calendar year, but would love to, you know, BAPG has sort of embarked on this initiative of focusing on sort of the non-monumental projects, moving down market a little bit, and would love to get just your perspective on that strategy, you know, 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 this 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 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's down, but you're still picking up a lot of work, it looks like. Let me get your perspective there, just the bidding environment.

Yeah, over the past two years, we've built a record backlog in the services business, and it's really been a step function change from approximately $500 million in fiscal 2019 to 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 Nishit, in general, the market is constrained in all parts of a 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 insurmountable. There might be some pockets where they have to work harder to get workforce in. I do not see that. Our team in services segment has done a fabulous job on project excellence, as they call it. And that means pulling all the resources much ahead with a stronger plan. So I don't see that as a challenge for us.

Yeah, and I think, as you know, there's a union labor component there, and we've got a really strong relationship with the unions in that business. And also, as Nasheed 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 Nishit, you talked about some of the inflationary pressures. I assume that's aluminum, glass, maybe some other elements to that. Are you in a position to pass that through in the coming quarters?

Yeah, great question. So we have short lead time and long lead time projects, right? So for the shorter lead times, we use a procurement organization to continuously challenge your 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 revise the 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 reaction 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.

Yeah, 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.

Okay. Thank you for taking the questions. Thank you.

Thank you. Our next question comes from the line of Julio Romero with the Dodian Company. Your line is open.

Hi, good morning, Ty and Ashit. Good morning. Good morning, Julio. 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.

Yeah, that's a great question, and I would start by saying that long term, we still believe 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 we've talked about opportunities for geographic expansion within that. I was just hoping to get your view on, you know, big picture, your long-term view of the renovation business?

Yeah, 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 is there 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.

Yeah, and if I can add to that, this renovation group that we have created in Apogee has got a 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, Nishit, that $20 million of incremental savings that you expect 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?

Yeah, roughly half and half would be a good estimate for that, Julio. I would say, yeah, 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 challenge 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. Male Speaker 1 Okay, great.

Thanks for taking the questions. Male Speaker 2 Thank you. Male Speaker 1 Thanks.

Female Speaker 2 Thank you. Our next question comes from the line of John Bratz with Kansas City Capital. Your line is open.

John Bratz Good morning, Ty, Rashid, 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, you know, 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 Nasheed 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 may 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 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 we'll 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 – 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'll 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.

Okay, good. Thank you very much.

Thank you.

Thank you. As a reminder, ladies and gentlemen, to ask the question, you will need to press star then 1 on your telephone. Our next question comes from the line of Bill DeZellum with Titan 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?

Yeah, sure. I can take that one. So 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 SodaWall, where continued market pressures and also the way the business projections are for the next years have led to that impairment.

Great. Thank you, Nishit. And then not to be too negative, but playing off of your comments about the future downturn or the 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 is starting to go down now. I'm confident that the team is working really hard and they're booking a lot of orders. As you can see, in quarter three, they booked $7 million of order. In quarter four, they booked $52 million of order. So they are working hard against the market's stream, so to speak, and I believe... But we will see some headwinds in fiscal 23 and 24 on revenue.

Yeah, 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, it would 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?

Yeah, I would say that overall we're seeing slowness across the architectural markets in general. So there's more softness in larger projects, and then the small project business and 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 break-even?

Yeah, 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 break-even volumes that we've talked about in past earnings calls. So the February weather events in Texas, as 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 as successful as we go forward. Thank you. Thank you.

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