Good day ladies and gentlemen, and welcome to the Q4 2015 Apogee Enterprises Inc., Earnings Conference Call. My name is Mark and I will be your operator for today. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I'd now like to turn the conference over to Mary Ann Jackson. Please proceed ma'am.

Thanks Mark. Good morning, and welcome to the Apogee Enterprises' fiscal 2015 fourth quarter and full year conference call on Thursday, April 9, 2015. With us on the line today are Joe Puishys, CEO; and Jim Porter, CFO. Their remarks will focus on our fiscal 2015 fourth quarter and full year and our outlook for fiscal 2016. During the call, we will discuss Non-GAAP financial measures when talking about Apogee's performance. You can find definitions for these Non-GAAP financial measures in our press release. Our call also contains forward-looking statements reflecting managements expectations based on currently available information. Actual results may differ materially. For information about factors that could affect Apogee's business and financial results can be found in our SEC filings. Joe will now give you a brief overview of the results and then Jim will cover the financials. After they conclude, Joe and Jim will answer your questions. Joe?

Thank you, Mary, and good morning everyone and welcome to Apogee's conference call. We will talk about Q4 and the full year for 2015 and give you a snapshot ahead of 2016. As you have now seen, we had outstanding results in the last quarter of fiscal 2015 and as we have had every quarter with strong revenues, gross and operating margin increases and increases in cash flow. For the full year, our results were a similar story of strong revenue and earnings growth driven by all four of our segments. In addition to the growth from our focus on new geographies, new products and new markets, we benefited from strong commercial construction market. Solid growth in the high-rise office sector fueled by employment adds and the subsequent decline in vacancy rates especially benefits Apogee. These architect influenced project are high value add for us. Looking ahead to fiscal 2016 for a moment, our outlook for revenues greater than $1 billion and earnings per share of $2.05 to $2.20 will be a record result for Apogee in fact the best in Apogee's 65 plus year history. We are well-positioned to deliver on the opportunities we see for fiscal 2016 and beyond. Turning back to fourth quarter results, our growth engine continue as we once again consistently grew revenues by double-digit and income more than 50%. Specifically fourth quarter earnings per share of $0.47 were up 74% from the prior year period on revenue growth of 15%. I'm pleased with the increases in our gross and operating margins which were up 290 and 240 basis points respectively compared to fiscal 2014 fourth quarter. We benefited by leveraging volume growth in architectural and large-scale optical segments and by driving productivity across all of our units. I'm encouraged that we converted 23% of…

Thanks, Joe. I'm also pleased with our performance in the fiscal 2015 fourth quarter and full year. Fourth quarter revenues were up 15% to $246.7 million, and operating income grew 62% to $19.6 million. We achieved a strong gross margin of 24.8% for the quarter by leveraging our volume, good product and project mix, good shop floor productivity, and favorable insurance expense. I'd like to add a bit more color to the quarterly segment results. In architectural glass, operating margins improved significantly to 4.9% with operating leverage, pricing, and increased productivity as we – in part, as we fully utilized the new coater in the quarter. This strong performance was achieved despite the expected headwinds from startup costs for the Utah facility as we began to bring on needed capacity in the quarter; as well as the impact of softer performance at our Brazil operation due to the slowed economy there. In the fourth quarter, the architectural services installation business performed well on flat revenues. This projects business had an 8.1% operating margin, a strong performance, but down slightly to last year on project timing and project mix. The architectural framing systems segment operating margin more than doubled to 6.3%. The businesses benefited from operating leverage on higher volumes as we experienced market improvement and share of demand gains resulting from market-leading quality, service, and lead times, along with geographic growth. In addition, we saw the effect of price increases in the U.S. storefront business that finally offset the higher aluminum costs we have been absorbing in the second and third quarters. The large-scale optical segment saw growth in revenues and operating income, with a solid 26.2% operating margin for the quarter. The slight decline in operating margin from last year is really just the result of incentives and some…

Okay. Thank you, Jim. Mark, if you could open the call up for questions from our fellow listeners, I would appreciate it.

[Operator Instructions] Your first question comes from Samuel Eisner from Goldman Sachs. Please proceed.

Yes. Good morning everyone.

Good morning.

Can you give us some additional color on the pricing gains that you were recognizing across all of your segments? I know that you mentioned that you raised price a few quarters ago to offset rising aluminum prices. But I'm just curious how long that should continue to last. Just wanted additional color on the pricing gains.

Sam, Joe here. Specific to the framing systems business we highlighted a couple quarters ago with the – we finally were able to get some traction on price to offset aluminum costs. That is sticking. We do anticipate to keep that impact going forward. And for all of our businesses, with their end market conditions, most of our architectural businesses are able to push for some margin expansion. I would say probably more through operational productivity than pricing, but we had some pricing tailwinds and I expect it to continue.

Great. And then to the backlog and order commentary. So I recognize that there is a timing mechanism. It seems like this is the second quarter in a row of a timing mechanism potentially constraining order growth this quarter. Can you just give us a little bit more color about what you are seeing in that kind of that front log of order activity? And then perhaps you can talk a bit about how the margins look in your backlog, now that it seems that you're being a little bit more selective in your project that you are putting into your backlog.

Sure, Sam. I never expected an orders question from you, so let me see if I can go for it here. Sam, as you've heard me say in the Street quite a bit, we have a pretty good visibility to our future awards. We report backlog. We have a very visible level of projects in review that are ready to go into backlog. Sometimes I get surprised if they drag on a couple extra weeks and we miss the quarter. We also have pending awards where we know it's our business. It's probably anywhere from 3 to 6 months before it will get into an order status. We have near-term business we're bidding on, either in a budgetary status or design development. And then we have visible work that's well out, more than a year – in many cases, several years. So I have sort of five levels of visibility to future work. We only report backlog. I'm very confident. The amount of work we have visibility to continues to be extremely robust. I do expect the first quarter order backlog to increase. I actually – we had $16 million in orders in the very first week of the new quarter I frankly thought would have fallen into Q4 and it came in the first week of March. It happens. We're confident. Our revenues for the fourth quarter of fiscal 2015 were the highest revenue quarter we've had in six years. And our backlog kept up with it, meaning we replaced those revenues with new entrants in the backlog. So I do expect we'll continue to see good activity on the orders. Our largest contributor to backlog is our services business, our installation business we call Harmon. As Jim and I had mentioned repeatedly, that is – it's relatively easy for me to flex our products businesses to pick up volume on a variable basis. A lot of the cost to flex that business in services is a fixed nature. We're focused on project selection. I do anticipate to continue to get triple-digit basis point improvement in margins in that business for the foreseeable future, as we are definitely seeing traction on being more selective, getting better projects. But the level of activity out there continues to be very strong, frankly.

That's a very helpful answer. And then just lastly, and I'll hop back in queue, when you think about the shift in the CapEx spend from fiscal 2015 to fiscal 2016, can you maybe give us some additional color on what specifically slipped? And then when you think about your capacity to reach the $1.3 billion goal that you have out there for fiscal 2018, do you have enough capacity? Have you made the right investments for the cycle? Any additional color there would be great.

Yes. Let me answer the latter part first. Jim can address the timing of the CapEx from Q4 that will go into this year. And there was nothing intentional; it's just some slippage of small projects. But we are capacitized for the growth primarily. We had to make one large investment in our framing system finishing business. That project is well underway and on track and on budget. That had some spend in fiscal 2015, a lot more in fiscal 2016. That was the primary capacity investment we had to make. A lot of our capacity and you heard Jim quote where our capacity utilization is. That can be misleading. We have various functions within a factory that can give a capacity constraint. It may be one operation within the glass fabrication factory, as an example, where we can make a relatively small investment to increase capacity of the whole factory by addressing a bottleneck. With our capital spend of $30 million to $45 million per year, we will be able to absorb the small pockets of capacity we'll need over the next few years. We do not need to make any substantial investments like we've made in the finishing business, or in this past year, in the glass coating business. So I would say the short answer, we are capacitized. The projects we have to do to address will fall well under the radar screen of what we'd say large capital projects that we'd be calling out on earnings. As far as the slippage, I will let Jim talk about the timing.

Yes, Sam. Maybe just one additional comment. As Joe said, it's really – we've balanced across capacity, productivity and capability. And other than the large project we have in framing systems, I think you'll see our continued emphasis going through the strap time horizon of capital associated more with productivity probably first and then capability. Relative to the timing shift, some of it was just projects just got started a little bit later than we had anticipated as of the last guidance. Some of it was in the major investment we have going on in framing systems right now. Some of the weather actually just delayed the timing. But we're talking about delays of weeks, those types of things. So we're talking about a few million dollars of either a project start or just actual cash flow that moved into fiscal 2016.

Sam, we certainly didn't put the brakes on anything. Our people are pretty busy with the kind of volume growth we've had. And the reality of the matter is – I'd like to believe we can do everything, but the reality of the matter is, some things slip because of the amped-up pace of work in our factories.

Great. I'll hop back in queue. Thank you.

Thank you, Sam.

Your next question comes from Glenn Wortman from Sidoti. Please proceed.

Yes. Good morning, everyone.

Hey, Glenn. Good morning.

Good morning.

Do you have any sense of the margin impact from the restart of the Utah facility in the fourth quarter? And do you expect to have any lingering effects going forward?

Yes. So the effect of the startup was about roughly 100 basis points on the segment, about 40 basis points total company. And it's really just a startup for Q1. We expect it to be neutral to slightly accretive in Q2, positive going forward.

Okay. Thank you. And then also if you could just go over your architectural exposure in Texas. Are you seeing any slowdown in the region? And also if you could just comment on your market expectations there for the coming year.

Yes. I'll start, and Jim will give you some more details. We don't have significant exposure to Texas. Last year, we had a couple of projects that paused. Nothing significant; hasn't really had an impact on our backlog. Our operating plans were built subsequent to the few projects we saw go on delay. Nothing we have in backlog has slowed down, and our award activity is very balanced across the U.S. Jim knows the percentages of work in Texas, specifically around the Houston area, but it's not impacting us.

Yes, Glenn. So for the full year, our architectural revenues to Texas in total were roughly 10%. And Houston, which I know I think is kind of a focus point for everybody, was a maybe 6%. And that was pretty constant, F2014 and F2015. When we look into backlog, the Texas-related backlog – and, again, remember, roughly half of our overall backlog is our projects business but about 25% of our total backlog was related to Texas. But, actually, Houston represented less than 10% of our total backlog. So and those are all projects that are active and underway. But we do actually see a very active forward-looking pipeline, particularly in the Dallas and Austin market as it relates to Texas.

Okay. Thanks for that. And then finally if you could just provide us with an update on your retrofit initiative, orders to date, and your expectations for this year and beyond.

Yes, Glenn, thanks. We were at about $25 million in orders so far in this initiative. We expect to do double that, just this year alone. Our team that's working that initiative made terrific inroads with building owners, the FCOs and facility maintenance organizations. I made an industry speech about this recently. I think the activity levels are continuing to amp up. The amount of building stock out there today that has non-low-E glass and primarily monolithic meaning not an insulated unit is 100x the amount of new office space construction every year. And we continue to see people realizing that the rental rates go up significantly with building upgrades. So I continue to be bullish. I've said it in the last couple of years; the selling cycle is quite long, perhaps longer than I would've expected, but we got on the scoreboard a couple of years ago. The business amped up last year. This past fiscal year we doubled our revenue or our orders, and I expect to double again this year. So the initiative has been proven to be well worth our time. And I expect this will continue to be a positive for our entire industry, not just Apogee.

Thanks for taking my questions.

You bet, Glenn. Thanks.

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

Hey, good morning. Nice quarter, guys.

Hey, Brent. Thanks.

Good morning, Brent.

Jim, the $6.6 million increase in SG&A, can you kind of break up what was compensation versus Alumicor, versus any other items we consider moving that?

For the quarter?

Yes.

Yes, not really much to Alumicor, because they were in our business a full quarter a year ago. Probably a little less than half would be related to compensation-related, and some of that was timing. We have a mixture of incentives around the company, based on total company results and kind of more local results. In Q4, in some areas was a really strong quarter that kind of made a step change in terms of some of those kind of incent levels for the company. So that was the largest component. Then down below that, maybe a little more than 10% of the increase was related to just timing of some consulting activity that we have going on. But let me add, just lots of miscellaneous.

Got you, okay. And then, Joe, if you guys temper the amount of work you bring on in services, what sort of margin target, or targets, or expectations do you have kind of in the near term? And then how do we think about the profitability of the segment over time, as you focus a little more on that?

Well, as far as operating margins in that business, as we said, even on a flat quarter this quarter which was really timing-related only, we still exceeded 8% operating margin. I expect that business to be double-digit. We certainly should be able to do that. I expect at least 100 basis points of margin enhancement every year in that business. That's going to primarily come from project selection. It's not a manufacturing organization. They do have operations, but I would expect triple-digit basis point improvement over the next three years in that business. And based on the projects that Jim and I have approved and reviewed this quarter, I'm very comfortable we're going to achieve that. We are, indeed, being very selective as we're actually working to fill our work schedule. And it allows us to be more selective.

And Joe, is this sort of a change in terms of the types of work you're going after versus what you've done in the past?

No, not really, Brent. It's the similar kind of work that the services business has always done.

Okay. And then can you just update us on what you kind of seeing on the institutional side of the market, particularly non-healthcare? I think you've tended to be a little more leveraged to the private side historically. And are you changing your strategy to try and capture a little more of that market? How should we think about the opportunity there for Apogee kind of going forward?

No. We haven't changed our strategy. You are correct. We've been a little bit more private than the government sector. The market is moving our direction a little bit with that regard, so we'll enjoy some tailwinds there. We like to talk about office quite a bit because it's the bellwether. But we do participate in the MUSH market, Municipals, Universities, Schools, and Hospitals. And that's a very strong market for our retrofit initiative in particular. So – but aside from the fact that we're trying to amp up our retrofit initiative, the retrofit will be more towards the MUSH market, as opposed to the high-rise condos or the high-rise office buildings. And so with that regard, I would say there's a slight focus and mix change. But it's mainly around this retrofit initiative, not around our core business results. We continue to pursue the same markets.

Okay, thanks. And just one more, if I could. Can you sort of update on the acquisition pipeline, where you may be looking?

Yes. We do have a good pipeline of work we're looking at. And when we hang up from this call, Jim and I will be meeting with our seven business unit leaders to review our pipeline once again. Obviously, I'm not going to comment on things we're actively looking at. But I can assure you we are working. We see it as a strategic place to invest our strong balance sheet. But you've heard me say it, and I've learned through my life, I will walk away from 10 good deals before I do a bad one. So we're very, very selective. We know what we want to work on, and we don't want to buy a broken business. So we'll be selective. I do believe there will be more deals in our future, but I don't want to predict when, at this time.

That's it. Thank you.

Okay, Brent. Thanks.

[Operator Instructions] Your next question comes from Scott Blumenthal from Emerald Advisers. Please proceed.

Good morning. Thank you for a nice quarter.

Hey, Scott. Thanks. Good to see you couple of months ago. Thanks.

Good morning, Scott.

You too. Joe, can you maybe talk about – Sam, I guess, asked the question about orders and maybe the order cadence. But can you talk about some of the reasons that these projects may be taking a little bit longer than expected? I know that we've been talking with some E&C companies lately. They've complained especially about permitting. But maybe some of the things that you're seeing that are causing some of these push-outs.

Yes. Well, we're all improving our lead times. We are, in particular. We don't want to take a deal with bad terms. So our business people, our project attorneys, work every project contract very hard to make sure we're comfortable with the terms and conditions. The industry – the amount of work that's been permitted is growing significant of recent. In fact, buildings of greater than 20 stories are – continue to reach peak levels. So we do expect the next couple of years, these projects to continue to give us tailwinds. And as the market expands like it has, many of the installers are busy, and it forces the general contractors to call in new subcontractors to do the work. And that creates delays in the entire process. So that's the bad news. The good news is, it allows people like us to be more selective. But as I said, we're not seeing any project cancellations or any significant pauses. I mentioned a couple that happened last year in Texas relatively insignificant. But our timing – I wouldn't say we've seen delays that are any longer than normal. We just have a significant amount of backlog impact from our project business. These are large projects. And a $5 million or $6 million project slipping one week can make the backlog look goofy on a quarter-to-quarter comparison. So Jim and I are always careful to say, listen to us, listen to what we're projecting for the longer term, be careful on a quarter-by-quarter analysis. I do expect, as I said, an increase in the first quarter, based on what I'm looking at, what we have in hand and what we've booked already in March and the first week of April.

Scott, I would add that a majority of the timing issues that we're running into are really project-specific, as it relates to just maybe some of the component sequencing or terms, as Joe said, in terms of we're being – part of our selectivity is related to terms and conditions. So those have been really the issues. Very few issues, at least that we're hearing about, where it's a permitting issue.

Understood. And Joe, you did mention earlier in the call about taking pricing when you were being faced with some higher aluminum costs. It seems like many of the metal markets, aluminum included, started to soften up a little bit. Are you seeing, or are you expecting, any turn in the cost of aluminum that might benefit you over the next couple of quarters?

I hope so. It's possible. And we hope that would provide some tailwinds for us. Right now, I'm not counting on it. But I think the odds are more the opportunity than risk to aluminum to the LMI, the London Metal Exchange or index. So hopefully there's more opportunity than risk in that. But it can be a crapshoot, to be honest with you.

Okay. And how about on the coating side of the business, and maybe some benefit that you might get from lower coatings base costs because I suspect that some of that, if not the majority of it, is energy-related or petroleum-based.

Our coating, I think you heard Jim report the 400-plus basis point expansion in margins at our glass business, which is the coatings business. That was driven by significant productivity, the full impact of the new coater that is more productive in that business, as well as continued focus on margin expansion through good pricing. And you saw the impact in our results in the fourth quarter and we certainly hope that will continue.

Scott, our primary source of energy to run those coaters is electricity, so we really don't see the benefit. And most of – based on where our plants are and most of our electricity is based on coal-powered facilities. So we're not really seeing any benefit on those input costs.

Got it. Thank you, gentlemen.

Thank you, Scott.

Your next question comes from Samuel Eisner from Goldman Sachs. Please proceed.

Hey, just two quick follow-ups here. Joe, you mentioned before regarding the first week of the quarter you took in orders. I can't remember if it was 16 or 60. And then perhaps you could just give us an update of how March productivity – or not productivity, but March orders have gone for you guys.

Yes, I said 16, as in 1-6 in the first week, just in our projects business. So my point was that could have happened in the first quarter, and the same thing could happen at the end of my fiscal first quarter. That could have happened in the fourth quarter. So my point is the order activity continues to be where we expect it to be and, hence, the comments we make on our projections. Our March activity was right where we expected. We had a good March on our business. And we've got a long way to go for the quarter, but we're off to a good start. And I expect our first quarter orders to be in line with the guidance I've given here today.

Got it. And then just quickly, you mentioned, regarding capital allocation, that you would look at shareholder returns. Can you talk a bit about that in greater detail? Obviously you guys have a dividend not a huge amount of yield, but a nice dividend. Just any comments that you can give there would be great, in lieu of, let's say, M&A.

Yes. We like our dividend policy. I hope – will continue. My projection is that policy will continue. We do not have a share buyback policy aside from the fact that we try to offset dilution from compensation plans. And we see a better strategic use of our cash through investing in productivity, CapEx, and through potential acquisitions. So I don't see any change to our dividend or share buyback history, let's say. And obviously market conditions can change things. But right now, I think we'll continue to be consistent with what you've seen in the last 4 to 5 years.

Great, thanks.

You bet, Sam. Thanks. Mark, are there any more questions?

No, there aren't.

Okay.

I would now like to turn it over to Joe Puishys for closing remarks.

Okay, thanks again. Appreciate that, Mark. And folks, thanks for your questions and listening to our story today; obviously, an upbeat message. And we'll continue to look forward to driving good results and we will look forward to talking to you in a couple of months when we report our first quarter results for fiscal 2016. Have a great day, everyone. Thanks.

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect and have a great day.