Good day, ladies and gentlemen, and welcome to the Second Quarter 2015 Apogee Enterprises Incorporated Earnings Conference Call. My name is Juanita and I will be your operator for today. At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of this conference. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to Ms. Mary Ann Jackson. Please proceed.

Thank you, Juanita. Good morning and welcome to the Apogee Enterprises’ fiscal 2015 second quarter conference call on Wednesday, September 17, 2014. With us on the line today are Joe Puishys, CEO; and Jim Porter, CFO. Their remarks will focus on our fiscal 2015 second quarter and our outlook for fiscal 2015. During the course of this conference call, we will make forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are based on current expectations and the current economic environment and are of course subject to risks and uncertainties, which are beyond the control of management. These statements are not guarantees of future performance and actual results may differ materially. Important risks and other important factors that could cause actual results to differ materially from those in the forward-looking statements and projections are described in the company’s Annual Report on Form 10-K for the fiscal year ended March 1, 2014 and in our press release issued yesterday afternoon and filed on Form 8-K. Joe will now give you a brief overview of the results and Jim will cover the financials. After they conclude, Joe and Jim will answer your questions. Joe?

Thank you, Mary Ann. Good morning and welcome everyone. As you have read, we had exceptional revenue, earnings and backlog growth in the quarter. Our architectural markets have strengthened and we continue to win share gains by executing our growth strategies. All three architectural segments experienced significant double-digit growth in revenues and earnings. I am particularly pleased that our architectural businesses are starting to deliver on their potential even as we overcome some higher costs to expand our workforce and capacity in this segment. In addition, our backlog growth to $480 million, up 58% or $176 million is at its highest level in 6 years and positions us well for the future. Most of the work we are currently booking will be delivered in fiscal ‘16. Our backlog has been growing across the Board at improved margins with sequential growth in all four business segments both quarters this year. Jim will take into lot more detail on the breakdown of that backlog. In the second quarter, our revenues were up 30%, operating income up 66% and our earnings before taxes up 70%. Earnings per share were $0.57, including the aforementioned $0.22 tax credit we earned in the quarter. Excluding that tax credit, our adjusted EPS for the quarter was up 67% to $0.35. We earned the tax credit in August with the successful startup in commercial production of coatings on our new $30 million architectural glass coater, which will provide new product capabilities and better productivity. It was a major project and it required massive effort from our corporate and Viracon glass fabrication teams and flawless execution of the Viracon operations group. Trust me this was not falling off a log. I am also pleased that our cash and short-term investments grew to $25 million in the quarter, up $18…

Thanks, Joe. I am also pleased with the strength of our second quarter performance. Our revenues grew 30% or approximately 23% organic growth, excluding the impact of the acquisition made in third quarter of last year. Earnings per share were $0.57. Excluding the impact of the tax credit, adjusted earnings per share were $0.35, a 67% increase over the second quarter last year. Each of our three architectural segments was a strong contributor to our revenue, backlog, and earnings growth in the quarter and the Large-Scale Optical segment continues to deliver solid profitability. Our second quarter results underscore the strength we are seeing in our core U.S. architectural market. It’s evident that Apogee’s architectural businesses are gaining share as we grew revenue for all our architectural businesses collectively by 34%, approximately 25% growth organically, which is well above the 10% market growth we are expecting this year. Although the operating income and adjusted earnings per share were up almost 70% compared to the second quarter of fiscal 2014, the gross margin of 21.3% was down slightly from the prior year period gross margin of 21.6%. On these higher revenues and volume, our gross margins were negatively impacted in the quarter in comparison to the second quarter last year by four items. First was the mix of business in the quarter. Our highest margin in Large-Scale Optical business was a smaller percentage of total revenues this year. Second, the two storefront businesses were impacted by higher aluminum costs in the quarter and the soft Canadian economy. Our U.S. storefront business should start to benefit from price increases during the third quarter and market conditions are continuing to improve in Canada. Third, we experienced higher healthcare costs in the quarter. And lastly, we have had ramp up costs to address volume increases,…

Thanks, Jim. So, as you have heard today, our growth is significant and above our end markets. Our backlog has been growing across the Board at improved margins, with sequential growth in all four segments in each quarter this year. We are incurring some costs this year to accommodate what I believe to be long-term growth and we are focused on smartly capturing the sustained growth with an eye on the future horizon at all times. Most of our added costs are variable and our capital expenditure investments drive productivity as well as capacity. I think the good news is in the quarter and year-to-date we had very solid results. The better news is I believe there was room for improvement and I am the first to admit that, but we had a great quarter. And I now look forward to your questions. So, Juanita, if you could open the call up for questions from our guests. Thank you.

Thank you. (Operator Instructions) Your first question comes from the line of Samuel Eisner with Goldman Sachs. Please proceed.

Yes, good morning everyone.

Hey, Sam.

Good morning.

Just on the new facility or I guess the Utah facility, so this was a facility that was closed about a year ago and now you are reopening it a year later. So, just curious the decision-making process kind of I want to understand what exactly has happened with that facility and then the internal discussions around that?

Yes, sure. Sam, this is Joe. It’s one of our three U.S. facilities for our glass fabrication business known as Viracon. When I first came here, I thought we should have addressed capacity. We made some investments in our other facilities, namely in our Georgia facility. Once we completed that, it allowed us to successfully shutter the factory in Utah, which is near the Las Vegas area. We announced at that time, that we believed based on our view of the end markets, that it would be approximately 2 years before we would be reopening it. We are going to come in under that timeframe and we are all pleased of what’s going on in our end markets, our share gains and we pulled up that timeline. So, we will spend a couple of million dollars to invest in that factory as we reopen it. And I think we have proven we know how to address capacity in that business. And so it’s all part of the master plan. It’s just happening little faster than we planned.

Understood. And then so with the addition of this facility as well as the new one that you are making in Wisconsin, want to understand a bit better the 10% margin goal for fiscal ‘16, obviously there are some incremental costs that when you first gave that target are being added on here. So, want to understand how do you – your feelings behind that 10% margin goal for fiscal ‘16?

Yes. I am very confident in the goal, Sam. The factory in Utah really is unrelated to whether or not I would hit that number. I would tell you it would have been easier on us if we had 12% growth each year. It’s frankly relatively easy to hit entitlement conversion when you are growing 5%, 6%, 7%, 8%, 9% consistently. In our 3-year horizon, the market did nothing for us in the first 18 months. It started to grow and now it’s been explosive. So at 30% growth, it’s a little harder to convert your entitlement. As I mentioned, I believe all seven of my businesses had an opportunity to perform even better, but it is a lot of work to address growth, you have some incremental or step increases in cost as you add shifts. You add people – when we initially add people, we added over 400 production people in our architectural businesses and that we have the highest attrition rate in that group. So, you run into many inefficiencies. I do believe by the end of fiscal ‘16 we will be at that rate. As I mentioned in the last couple of reports, I admit it might be into the first half of fiscal ‘17 before our TTM reflects the 10%, but I do believe we will be at that rate by the end of fiscal ‘16 and hopefully on a trailing 12 months sometime early in fiscal ‘17.

That’s very helpful. And then just lastly regarding project timing, it sounded as though this quarter I believe the services segment had some benefits from project timing at least on the revenue basis. Just curious how much of that benefit occurred and then also to Jim’s comments regarding project timing, is the expectation that backlog is going to decline sequentially into the third quarter? Thanks so much.

Yes, sure Sam. Jim can chime in as well. I do believe at some point the large increases in the backlog from our services business will level off. I frankly believe we will have a good third quarter before that begins to happen. Our timing, frankly, the business is performing extremely well, but pretty much on forecast. Earlier in the quarter, I thought we might have a little bit of a timing slippage. It didn’t happen. We had good project execution at better margins. You all asked me about margins in backlog. In the last three years, we have improved margins in backlog about 400 basis points. We are in that 100 to 200 a year improvement. We have worked off most of the projects that were booked in the most lean periods, but we continue to see improved margins through smart project selection and excellent project execution. Jim, if I missed anything please jump in?

Yes, no, I will just elaborate it, but you are right, Samuel, which is our Architectural Services segment is probably the lumpiest, if you will, based on project timing. And so I think Q2 revenue was a little bit larger relative to the rest of the year based on just that kind of timing. So we don’t expect similar growth rates year-on-year for the second half of the year. And then also as Joe said, while we continue to expect the trend of increasing backlog, probably the rate of increase in backlog was larger in the second quarter than at least we have line of sight to in the third quarter.

That’s helpful. I will hop back in queue. Thanks.

Thanks, Sam.

Your next question comes from the line of Brent Thielman with D.A. Davidson. Please proceed.

Hey, good morning.

Hey, Brent. Good morning.

Yes. Just looking at how the second half could play out, traditionally Q3 has been your strongest quarter, but with maybe some higher costs for ramping up in architectural, should we assume Q4 is likely a stronger quarter as you are absorbing more of those costs here in the current quarter?

No, I don’t – I would not assume that, Sam. In fact, I would say this has been an unusual year. We probably picked up, but in the architectural side, ramp up costs earlier than expected for the reasons I mentioned. Secondly, in my comments, although they were brief, our Large-Scale Optical business, which is a gem of a business and the unfortunate truth is when you have such a high margin business like that, when you have a quarterly comp like they have had, it certainly impacted our quarter results. We will see a strong contribution from LSO in Q3 even more so than usual. So, I expect Q3 to continue to be our strongest quarter this year.

Yes. And I think similar to what we just happened to see last year as I think Q3 and Q4 will be relatively balanced by Q3, we do expect to be a bit stronger in Q4.

Got it. That’s helpful. And then within your backlog, is there kind of a higher proportion of larger projects than what you have I guess typically seen in the past?

We have a pretty good balance of large and small projects. And frankly, our largest contributor to backlog is our services business. However, this year the largest growth to backlog has been our glass fabrication business, which is a compilation of a lot smaller projects. So, I think the services business has booked some larger projects, but in the total scheme of the Apogee backlog, we are seeing a much more balanced. And within our end markets, the largest growth has been the large Class A commercial buildings for the office sector. So, within Viracon or our glass fab business, the backlog is seeing larger projects, but they are certainly much smaller than the services. So it’s a combination, I wouldn’t say there is a big theme there, Brent.

Okay. And then you commented on kind of the end market mix there, it sounds like most things are looking pretty good. Any signs of bottoming in the institutional side or has that remained pretty soft?

Well, we have certainly seen a shift within institutional from government to non-government, healthcare, etcetera. That’s certainly healthy. Jim and I have been – I’d like to pat ourselves in the back, we have been pretty good about gauging the McGraw-Hill data, discounting it two years ago and I think we are right on that. I believe we are on the mark with now comfortable that we are at a period of sustained growth through fiscal ‘18. And so for 3 years of course in this global economy, geopolitical events, anything can happen, but we are feeling pretty robust for the next 3 years. So, we do not see a cliff in the near future, but trust me we are watching it like a hawk. I think institutional is certainly not growing. The business has moved more to what we like, which is the office sector.

Okay, thanks guys.

You are welcome, Brent.

Your next question comes from the line of Jon Braatz with Kansas City Capital. Please proceed.

Good morning, everyone.

Good morning, Jon.

Hey, Jon.

Jim, just a clarification, the Utah expansion and the Wisconsin expansion really will not entail much in terms of startup costs?

The Utah expansion, I think Joe just mentioned is going to require about $2 million of capital.

Right.

And then there will be just some normal startup costs in terms of kind of ramping in terms of hiring. The one real benefit that we have with that facility, because when we closed it, we intended to reopen it and so for really a majority of the critical positions we actually had people that were willing to relocate to our other architectural glass businesses and they are now teed up to go back to Utah and reopen that. So, that will really accelerate and that will just kind of have a normal ramp up. And so there will be a little bit of headwind for the initial ramp up. And then in the Architectural Finishing business, so that’s a bigger capital investment as it’s an expansion. And so that’s going to be about $15 million, probably two-thirds of that will actually occur in fiscal ‘16, a third of it this fiscal year, but we expect to be up and running in that facility by next summer.

Okay. Joe, speaking of CapEx, we have had three years, consecutive years of pretty heavy CapEx, you have added a lot this year. When you look into 2016, will we see some leveling off or not leveling off, some decline in CapEx?

No, I don’t think so, Jon. We probably will be looking at levels similar to this year. We are really not through our planning process yet. We just wrapped up our strategic planning process this week. I would say – I would remind you though every capital project we are launching has productivity in it. So, even capacity investments, we talked about what we call the super coder for architectural glass business, the largest single investment we have made since I joined the company was certainly not done at the time for capacity needs, not one iota, it was all for productivity and product capability. And that’s the case with all these capital, even the capacity investment, Jim just referenced in Wausau, the finishing, that is a new – will be a new line. It will be more than 50% add to a particular process that’s stressed right now because of volume and it will operate more productively. If the day comes, I have to take down one of my other lines. It certainly would not be the new line and we continue to gain. So, I am comfortable with the ramped up level of CapEx. It’s not extremely higher than D&A, but it is running higher and frankly making up for some lean years, where I think we could have continued focusing on productivity.

Sure. One last question, Joe, you talked a little bit about LSO being comparable for the full year. Two things. Number one, are you talking about referring to both revenue and profits? And then secondly, what do you see out there that gives you the confidence that the second half is going to pickup and get to that comparable level year-over-year?

Yes. The first part of your question, yes, I do believe comparable both on revenues and income. I think the small business million dollars in sales can move the bottom line pretty far. So – but in general, we have good radar. We have got – it’s a business that has incredible stickiness with its customer base. And I would say we have got good radar on what we expect for orders in the second half. I remind you all, I think Q4 we were up 660 basis points in margin year-over-year, so –and that was just two quarters ago, three quarters ago. I expect margin basis point enhancement in Q3 and for the full year to be directionally close. Unfortunately, the end markets for that consumer product are still relatively flat. We are doing some great things with new products. We have just launched that are going to start to take traction this year, not a lot of sales, but we are excited about it. Our efforts to grow in Europe continue to be successful. So, we don’t need – when architectural was plummeting and that business was growing 5%, of course, the mix looks wonderful, conversion looks fantastic. When that business is relatively flat and architectural was growing 30%, it does hurt my conversion mix, but it’s still as I said it’s a very healthy business. And I think we are going to need a couple of more quarters of strong consumer confidence before we see the end markets get much better.

Alright, Joe thanks much.

You bet, Jon.

(Operator Instructions) Your next question comes from the line of Colin Rusch with Northland Capital Markets. Please proceed.

Thanks so much guys. With the new investments in capacity and as you go through this ramp and considering the mix you have pretty good visibility, could you talk a little bit about incremental operating margins for the growth that you are looking at in the back half of this year and as we look out over the next year or two?

So, Colin, I think this year, we have been talking about kind of our conversion or incremental margin at kind of a 20% rate for the year and we talked about some of the things in terms of mix of faster growth in some of our lower margin businesses and those types of things. And then we have experienced some of the headwinds that we talked about. As we look to next year, I think our goals are back in the 20% to 25% incremental margin or conversion rate.

Yes, Colin, it’s Joe here. Even though, our Q2, I said, results were impressive with the income growth conversion certainly isn’t going to satisfy everyone. However, you peel back the onion we have seven businesses, six in the architectural sector and LSO. We already know LSO was an off quarter. We are expecting that to turnaround in Q3. Within the architectural business, four of those six businesses had very solid conversion, but we mentioned the storefront businesses both had issues in the quarter with regards to aluminum costs and end markets in Canada. So it’s not fair to look at the conversion in total and address it, it is fair to say why was your conversion low in these two businesses. And I hope we have explained that. We do feel better about second half pricing in the U.S. business. And we do feel better about the end markets in Canada. So – but I do believe we should be in the 20% to 25% conversion for those businesses in the architectural segment. And while everyone might not fire on all cylinders, my expectation is that it should.

Okay. And then just about capital efficiency, I mean, you guys have obviously got a lot of infrastructure to work from these incremental CapEx investments seem like there is essentially an awful lot of leverage. Could you just talk about internal expectations on returns and what your benchmarks are in terms of adding those – adding those basic capacity in making those investments?

Colin, we use that internal return on invested capital of 15% in evaluating capital projects.

And what’s your expectation on these projects, because it looks to me like there is potentially a significant amount of upside to these investments that you are making to that 15% hurdle rate?

Well, they all depend on capacity utilization, but our outlook for these businesses is that they will be very attractive investments.

Okay. I will take this offline and will then try and get a little bit more detail, but thanks so much, guys.

Thanks, Colin.

Your next question is a follow-up from the line Samuel Eisner with Goldman Sachs. Please proceed.

Yes. Just a few just kind of quick follow-ups here. Just on the gross margin headwind in the quarter, you said it was about 200 basis points year-on-year, just curious how you kind of parse out the four items, was it about 50 bps per item or was some larger than others in that year-on-year headwind?

Well, when you look at year-on-year, I mean actually just the business mix, I mean the Large-Scale Optical being a smaller percentage of our overall revenues probably has the largest impact and then the others are kind of equally impacted.

I mean, it stays close to that Sam.

Yes, that’s helpful. Just – and then in terms of just long-term capital allocation, I think last cycle towards the end of the cycle you guys looked at making Greenfield investments internationally, does these roughly $70 million of CapEx investments that you are making in the new facilities, does that basically limit you going forward in your ability to look internationally for Greenfield opportunities or how do you think about long-term CapEx plans?

I am glad you asked that, Sam. No, it certainly does not limit us. We have a ton of capacity. You have heard me use the term, drunk, so I have no plan to get drunk and disorderly, but we do have a lot of capacity. I told my people when I come here don’t waste a good recession, but step on the accelerator before we come out of the curve as long as you think you are coming out of the curve. Right now, it’s kind of turned. We – I want to make sure we don’t overrun the growth curve and drive into the ditch though, we are constantly looking at that. But we also do not want to fall victim to missing our stated growth potential just because our end markets are very strong right now and we are growing and addressing capacity. All those opportunities are still out there. We make sure we don’t spread ourselves too thin with management execution capability, but capital resource is certainly not a barrier for us at this time.

And we continue – we generate significant amounts of cash in the up-cycle, but that said we will evaluate all exciting opportunities, but we also are really closely watching the markets and it’s picked up quickly and will be sensitive to investments that we are making where we believe we are in the cycle.

Great. Thanks.

Thanks again, Sam.

And at this time, we have no further questions. I would now like to turn the call back over to Joe Puishys for any closing remarks.

Okay. Well, thank you Juanita and everyone for joining in today. Thanks. Just one last time, I thought it was an exceptional quarter. I remain extremely optimistic about our long-term and look forward to reporting another great quarter for you in about 90 days. You all have a great day and we will talk to you soon. Thank you all.

Ladies and gentlemen, thank you for your participation in today’s conference. This concludes our presentation. You may now disconnect. Have a great day.