Apogee Enterprises, Inc.

Good day, and thank you for standing by. Welcome to the second quarter 2022 Apogee Enterprises, Inc. earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during this session, you'll need to press star one on your telephone. Please be advised that today's conference may be recorded. If you require any further assistance, please press star then zero. I would now like to hand the conference over to your host today, Jeff Hibsham. Please

Thank you, Michelle. Good morning, and welcome to Apogee Enterprises' fiscal 2022 second 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. 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 gap measures are provided in the earnings release we issued this morning. I'd 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'll turn the call over to you, Ty.

Thanks, Jeff, and thank you, everyone, for joining us today. This morning, I'll discuss our second quarter results and the trends we're seeing in our business, share some insights about the rest of the fiscal year, and provide an update on our strategy work. Then the sheet will give more details on the quarter and our outlook. After that, we'll take your questions. So let's start with the quarter results, highlighted on page four 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've 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 incomes. 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 our 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 two years, we've added new talent to build a stronger procurement organization aligned to our business segment priorities. This team is offsetting some of the inflation impact through sourcing alternatives, supplier negotiations, and driving cost savings in other categories. Even with these efforts, we were not able to fully offset increased costs of materials and freight. We are achieving meaningful progress in procurement as well as driving costs 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 face 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, 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 five 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 state's pro 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've discussed previously, this was a rigorous process that analyzed all aspects of Apigee'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 six 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're 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're 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 our go-to-market approach and increase focus on our target markets. The changes in framing systems will also improve execution and, importantly, reduce overall costs to raise our margin levels. Finally, we are moving the SodaWall 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 Nishit to provide more details on the quarter and our outlook.