Good day, ladies and gentlemen. And welcome to the Apogee Enterprises’ First Quarter 2018 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time [Operator Instructions]. As a reminder, this conference call is being recorded. I would now like to introduce your host for today’s conference, Ms. Mary Ann Jackson. Ma’am, you may begin.

Thanks Kelly. Good morning, and welcome to the Apogee Enterprises’ fiscal 2018 first quarter conference call on Thursday, June 22, 2017. With us on the line today are Joe Puishys, CEO and Jim Porter, CFO. Their remarks will focus on our fiscal 2018 first quarter results and our outlook for fiscal 2018 full year. This quarter, we’ve added slides to supplement the information we’re providing in our conference call remarks. These slides can be downloaded from our Web site. The PDF is located adjacent to the Web site link. 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. We called out adjusted earnings related to our recent acquisitions in our first quarter release, and have included table to reconciling non-GAAP financial measures in this release. Our call also contains forward-looking statements reflecting management’s expectations based on currently available information. Actual results may differ materially. More information about factors that could affect the 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 Jim will cover the financials. After they conclude, Joe and Jim will answer your questions. Joe?

Thank you. Good morning, and welcome to Apogee’s earnings conference call. Before I proceed with my usual business update, let me gain altitude for a moment. This release will require significant explanation, and Jim and I will do just that, painstakingly so if needed. Let me be clear and concise, we may [intend] guidance that we provided 90 days ago before adding EFCO related cost and EFCO profits. You will hear us discuss adjusted earnings today. The only items in our adjustments are deal closing costs and amortization of short lived intangibles from the Sotawall and EFCO acquisitions. We do not include business issues nor performance issues in our adjustments though I will refer to such items to allow you clarity on expectations, going forward. I also know we do not adjust for the $0.11 of interest headwinds associated with the borrowings to execute the EFCO deal. So let’s talk about the quarter. Q1 was a good quarter with performance largely as planned. We had cost related to M&A as we had anticipated, and no question we're experiencing revenue headwinds from our services business. But clearly, this is timing as evidenced by $100 million backlog growth in the last two quarters. Our framing systems segment did experience some unplanned costs, aluminum and manufacturing costs. Our aluminum price increases are now fully introduced to the market, more than offsetting the cost headwind. And our factories were performing as expected before the end of the quarter. Our markets continue to be very positive for our business. Our in markets are quite strong, if not stronger than 90 days ago. Bidding activity, employment adds across the U.S., lowered vacancy rates, increased architect billings, all moving in the right direction. In fact, most of you should have read that May’s Architectural Billing Index came…

Thanks, Joe. Good morning. As Joe noted, our first quarter performance was largely in line with our internal expectations. We recognized some strategic milestones during the quarter. We had our first full quarter of contribution from the Sotawall business, acquired in the fourth quarter of the last fiscal year. And we announced the acquisition of EFCO, which closed this month earlier in our second quarter. We're excited about the financial contributions, market opportunities and operational synergies, both businesses bring to Apogee in our Framing Systems segment. We also made our first shipment of oversized glass units from our Architectural Glass facility in Southern Minnesota, leveraging a significant investment we made for both new capabilities and productivity with additional automation. In terms of the results for the quarter, first quarter revenues grew 10%. We had growth in architectural glass and architectural framing systems from the acquisition of Sotawall, as well as growth in ongoing businesses, which was somewhat offset by declines in Architectural Services as we expected due to project timing. Earnings per diluted share were $0.56 and adjusted earnings per diluted share were $0.62, up 2% from the prior year period. Adjustments include $0.07 per share pretax for amortization of short-lived acquired intangibles associated with the acquired backlog of Sotawall and $0.02 per share pretax for acquisition related costs for Sotawall and more so for EFCO. These costs were offset by $0.03 per share of the tax impact. We've included tables explaining the reconciliation of non-GAAP financial measures in our press release. First quarter gross margin was 25.8% compared to 26% in the first quarter of fiscal 2017. Operating margin for the quarter was 8.9% and adjusted operating margin was 9.9% compared to the actual operating margin of 10.6% in the prior year period. Joe covered most of the items…

Okay. Thanks partner. Before I take your questions, I’d like to underscore that we feel very good about the future opportunities for Apogee; based on our bidding, awards, backlog and the external metrics, Jim just highlighted; and I’ll that add to that our new Sotawall and EFCO business units. With our visibility, we feel very good about multiyear growth. At the same time, the strategies we are executing around new geographies, new products and new markets are making Apogee a more diversified and stable company than we’ve ever been historically. We are specifically benefiting from our focus on mid-sized architectural glass projects, retrofit Framing Systems segment and then generally serve small mid projects in addition to our disciplined, reliable, repeatable business processes that are driving improved margins. In the last six months, we bought two great companies; Sotawall, a business approaching $100 million in revenue with very high EBITDA; and EFCO, a business greater than $250 million in revenue, that provides us a terrific opportunity to bring their mid-single digit margin to the same levels of Apogee, which we've shown we can do over the last five years. And I was very clear on our definition of adjustments. Jim and I have shied away from adjusted earnings, and it's never happened since I've been here. Frankly, I always considered folks using adjusted earnings as a comp out to explain away performance issues. Our results that we’ve talked about here are only adjusted for the deal related costs on amortization and closing the transactions. All other performance related items we discussed are included in our results. And as I mentioned, the impact on interest, based on our decision to invest those funds, is also included in our results and not in adjustments. So with that, Kelly, I'd like to open the call up for our distinguished guests to ask questions.

[Operator Instructions] Our first question comes from the line of Eric Stine with Craig Hallum. Your line is open.

So first I just wanted to start with Sotawall, starting to see or hear that the Canadian market is acting well and that there's recovery there. I'm just curious what you're seeing in terms of Sotawall and then also what kind of impact or inroads do you think you can make for the business as a whole?

Yes, Eric, great question. And yes, you're absolutely right. We are seeing a recovery in Canada. It has to happen. The vacancy rates are frankly non-existent at this point. We are seeing significant amount of tall buildings being bid out right now. We just got on the scoreboard with significant win on a great building in Toronto. And our leader of that business is feeling very bullish. As you know, when we bought this company, they were primarily almost entirely driven by U.S. revenues. And we knew we had a great opportunity to enjoy the eventual uptick in Canada. That's beginning now. I think our future bodes very well for that business.

Next one, this is more kind of big picture stepping back a little bit. You've obviously made good inroads in the midmarket. I mean, as you think about longer term and moving into the sub flat story market, I mean any thoughts there. Is that something that you may be doing a regional basis rather than blanketing the country? Or what are your thoughts around that, long term?

Eric, I'm not going to give away my strategies to my competitors. Let me tell you, we certainly participate in that segment in our framing systems business, in particular, our store front and entrance businesses, both in Canada and the U.S., Alumicor Tubelite. Obviously, your question might have been around the glass segment where we primarily focus on the mid and the larger buildings, that is certainly an opportunity for us, going forward. It's half the market. It does have a different logistical delivery profile, whether or not that's in my future plans, I prefer to keep my strategies away from my competitors.

Understood. Maybe last one from me just kind of bookkeeping, and I know it’s not a great indicator of the business. But I noticed you didn't give the Architectural Glass backlog growth in the release. So any details you can give there would be helpful?

I think the backlog I think it was down a little bit. It's really becoming a very insignificant metric for that business, it's almost everything we book in that business gets shift within six weeks, five or six weeks. So it's really only an indicator of our production schedule for the next month. I think the backlog went down $3 million to $4 million in the quarter. But again, we will report it in the Q, but it's really a non-metric for us, going forward.

Thank you. Our next question comes from the line of Samuel Eisner with Goldman Sachs. Your line is open.

So appreciate the comments on the stated transparency and not adjusting out. I want to better understand in your prior guidance, which what kind of an all in number of, I guess, 3.45 mid-point. What was the -- I think you guys had said that it included Sotawall amortization in there. So I'm trying to really figure out what was in there and how do we bridge the gap between $0.30 at the midpoint between the two respective guidance ranges that you guys used to have and now your new guidance range?

Yes, I'll let Jim give the numbers. But let me say again Sam, we maintain the guidance. We mentioned when we acquired EFCO, and I think in our closing announcement that the deal was accretive to Apogee, excluding the transaction costs and short-lived intangible amortization. Obviously, the inference there was it was dilutive, including those costs. That’s kind of where we're coming back to. We lowered -- it's a $0.04 change of -- in the guidance, so to speak, but that absorbs all of the intangibles and the deal related costs.

So Sam maybe I'll just kind of bridge that and I can tell, you're right at that the prior 3.35 to 3.55 included Sotawall in our numbers. So for kind of a steady state, when you think about it we add in the EFCO revenues at the mid single digit op margins, then we have the interest expense on the debt used for EFCO, as well as we're projecting about 50 basis points increase in our tax rate. So those two items kind of offset the EFCO contribution to get us to the new pre-adjusted GAAP guidance of 3.31 to 3.51. And then in terms of, to your question, in the $0.34 of adjustment associated with it, as you saw in the release, $0.24 is related to amortization for both Sotawall and the EFCO business. And it's probably about 75% or so related to the Sotawall business in terms of higher backlog impact relative to the EFCO business. And then in our outlook, the acquisition related costs of about $0.10 are primarily EFCO related.

And Sam I'll chime back in again. So what I did say well is if you took our prior range; we add in EFCO's EBIT; we add in EFCO's costs, the transaction related costs and the amortization of EFCO; and we absorb the impact of the interest of about $0.11; we come down to that $3.31 to $3.51, in other words that $0.04 movement. But in that $0.04 is EFCO’s results, meaning the profits, the transaction costs, the amortization and the interest.

And Sam, just one other comment, because it may be on peoples’ minds, which is, we chose that Q4 when we concluded Sotawall in the business not to report adjusted numbers; and candidly, got a lot of feedback from the investor community, wanting to have better visibility on the business in really more in underlying performance perspective, given significant amount of short-lived intangible amortization that we have in Sotawall. And so that combined with significance of the EFCO acquisition, but the change in adjusted results.

Sam, we kind of got our butts kicked from folks like you that wanted more transparency on the adjustments. And obviously, it's all four now with the magnitude of this deal, the cost related to this deal. But I told you, I've always felt adjusted results were a smokescreen, and I frankly never felt it was appropriate. We stand tall to our results, strong or not. But at this time, we're obviously forced to and as Jim said, the feedback we got we’re listening we have to do it good. We can walk you guys all the way through. But I just walked you back to that range with now the midpoint being 3.41. And then from there we walk back up to the adjusted range by pulling out only those costs that I mentioned.

So may be just to ask another way. The 3.45 prior number, there is about, you said 75% of the amortization expense was Sotawall, which would have been included in that numbers. Is that the right way I should think about that, that was roughly $5 million plus charge in the prior 3.45 associated with Sotawall?

Yes.

So just a couple other housekeeping items here, the gross margins, this has now been two or three quarter in a row that gross margins reported have either been flat line in terms of the growth and actually were down on a year-on-year basis in this quarter. Can you just give us an update on how you see gross margin trajectory, going forward? You guys were in a period where gross margins were accelerated and expanding, and now it seem though they’re flat toeing even down now in this quarter. So help me understand what's the outlook for gross margin? Why is this actually now stagnating, if you will?

Sam, let me read you the last page of the book, first. I believe Q2 we’ll see sequential and year-over-year improvements in the margins. You got to peel back the onion in Glass, they had a very, very good quarter and we did have just over a planned start up cost. My Glass business hit their numbers. We basically add -- we’ve been down in the factory, Sam and we had a significant part of the factory automation shutdown to move furnaces and cutting lines associated with the new building where we have the oversized equipment now. It was significant headwind that are for the most part, they only have a very minor impact in Q2, pretty much behind it. As I said, we started shipping oversized glass at the end of the quarter. So that $1 million significant impact that’s 100 basis points, the margin headwinds in Glass. We talked about the Services business. Clearly, we’re working through a hole in the revenue change due to the order situation of frankly six quarters ago. I cannot ring that bell, but we continue to win new business and the future looks bright, if you look at our backlog. In Architectural Framing Systems, again, I agree it was only 10.8% OM as reported, 12.7% if you pull out these deal related costs. And we highlighted 100 basis points due to the bankruptcy of a customer; it was a very tough situation. Jim highlighted totally unexpected and nonrecurring, the owner of the company died in a construction accident late in the fall. It was a terrible situation, not one of our projects. But the owner died and the business was not able to survive. And unfortunately, in early part of this quarter, we had to take that write off. Again, if not for that Sam and I’m not -- that’s in our results, now we’re up to 13.7%, we’ve got 100 basis points expansion year-over-year. And then if you go back to our large scale optical business, as I said, it’s a gem of a business and incredibly strong fourth quarter. This business is totally dependent on the retail purchasing pattern and we’ve got a new ERP system and we feel great about our future. And we’re looking for that business to be a great contributor this year.

Sam, specific to gross margin, I’ll just maybe repeat a couple of Joe’s points. But as we’ve talked, the key drivers for margin really across our businesses where we are now are going to be the leverage on volume, our productivity that we deliver and price and mix that we have associated with our businesses. From a sequential standpoint, our revenues were lower as we had expected. And so the leverage impact that we have in both our manufacturing and in our architectural services business where we need to keep all those resources because the work is ahead of us to perform. And then on productivity standpoint, we called out the fact that we had some higher manufacturing costs in the framing systems in the first part of the quarter. And so our momentum probably slow a little bit in the first part of the quarter back on track in the second part of the quarter. And then lastly from a price mix standpoint, we talked about the higher aluminum cost last quarter. And we talked about the fact that we had raised pricing, it took part of the quarter for that pricing to come into play. But by the last month of the quarter that pricing was in fact. So as we look forward, we see the volume leverage, we see the productivity back on line and then the improved pricing fully on board for that going forward.

Thank you. Our next question comes from the line of Brent Thielman with D.A. Davidson. Your line is open.

Jim, just a clarification. Do you say the remaining short lived amortization and other deal cost would all be absorbed in 2Q?

The deal related costs will be -- the amortization. And so again, majority of the amortization is related to the Sotawall acquisition, and that has about 18 month life, starting from the fourth quarter of last year. So we got a little bit more than a year to go on that. And then the short lived amortization related to AFCO, which is a smaller portion of that is going to start in our second quarter. And we’re still fine-tuning that but that’s going to have 18 to 24 month life as we finalize it.

Maybe in services, any other new work you picked up or even opportunities you see out there. Is there any ability to fill some of the remaining schedule holes here, I think, you've gotten in Q2? Or is that still set up into next year?

Clearly, the awards in the first quarter have virtually no impact in fiscal 2018. The business is doing its best to try to fill-in some of the gap created. We are not planning that in our financials. We don't have blue sky let's stay out there to try to fill at this point. Virtually everything being awarded now will be for F '19 and frankly F '19 and F '20. But obviously, with $100 million, I think we're up about 50 million in Q4; some of that was planned for F '18 and we got it; we're up another almost $40 million in backlog in Q1. And I commented, I expect our -- I don't give guidance with my numbers, but I expect our Q2 will once again reflect the good award activity in our Services business. And unfortunately, the revenue stream will be stronger in F '19.

Then on the glass business, Joe; a lot of talked about the mid-sized market and sort of shift in to there. Are you seeing any easing of competition or pricing in the high rise monumental projects that potentially you could get it back to that area.

We have not abandoned the high rise. We still do a significant amount of business there. We are far more diversified across our portfolio, thanks to our operational capability that the glass team has been able to effect through productivity, through lean, and to some degree, through CapEx and automation; consistently delivering five to six weeks, I can assure you. And I think when I got here that business was at around 12 to 14 weeks consistently; it spiked during the 2014 timeframe into 25-26 weeks as the industry; that's when we started to see recovery in our industry. Now, at five to six, we are very capable of competing for business. It's the same pricing and margin profile in the mid segment. But we still have a significant amount of business in the large buildings. We're seeing good growth in large buildings. And I don't see anything else and that is indicated by the building indices. There are some segments in large top buildings that we don't really participate in; multifamily housing in South Florida, never been a target market for us. There's some argument that perhaps that's peaked out; multifamily housing in New York, again, perhaps that's at a high point. But the rest of the office sector, which is our prime target market, continues to grow in both the mid and large.

And then last one, if I could. What kind of spillover effect do you expect from ramping up the oversized glass plant, are those costs kind of behind us now?

The costs were significant in Q1. I mentioned a little over $1 million. We wrapped up the movement of equipment in the very beginning part of this quarter, meaning the part of this month. I add maybe 10 basis points or so in the quarter. I expect the business to outperform and offset that.

Got it. Okay, best of luck this quarter.

Long way around the barn to say yes it was a first quarter. Frankly, the costs have been going on for a little bit, but it was significant in the first quarter when we actually shut down the lines and moved equipment.

Thank you. Our next question comes from the line of Chris Moore with CJS Securities. Your line is open.

So maybe with the -- on the operating margin, just real quick on the services side, obviously, down significantly on volume. Based on the type of business that you're seeing, can you get those margins back up to the 7% to 8% in fiscal year '19?

Yes, I absolutely feel we will be back. My long term goal for that business is to get to 10% operating margin, and we still have a path to get there. We will of course manage our costs acutely during this downturn, and the businesses do everything I can to maintain its growth trajectory for the future, while addressing short term cost opportunities. And yes, Chris, I fully expect our margins will see substantial improvement in F'19 and F'20 and we'll be back on the path where we were in F'17.

Similar conversation with the EFCO operating margin, just in terms of going from the 5% or 6% that's now to 10%, is that a three to four year timeframe or it is some low hanging fruit that accelerates that a little bitter. How do you look at that?

Well, we identified what we believe to be $10 million to $15 million in cost synergies. Obviously, that's two to three points or 200 basis points plus of margin expansion from our opportunities, primarily around supply chain. Listen, it was a five year journey for us here at Apogee. We'll try to be faster than that. Certainly, with all of our learning's, I believe three to five year journey to get to double-digit operating margin is an appropriate comment for me to make. And obviously, I will have impressive goals with my business.

Got you, thanks…

It's a great business. They were part of a wonderful company, called Pella, a residential window business; significantly substantially larger than EFCO, it's great company as it was; their DNA was not commercial construction; the leaders of that business had great opportunities, great ideas on doing the same kind of margin expansion opportunities we had, have done here; some involving CapEx some not. And the kind of company we are, we’re prepared to make those bets in a business that we know and love.

Last question, just back on the intangibles; so Sotawall, basically, an 18-month life started from this January; EFCO 18 to 24 months just starting. Is that -- if it reasonable think that the amortization is smooth over that timeframe, or is it little bit more accelerated in the beginning?

Yes, smooth over that timeframe.

Thank you. Our next question comes from the line of Jon Braatz of Kansas City Capital. Your line is open.

Joe, couple of questions. Number one, if the market continues to grow in mid single digits, is there any need for Apogee to spend money on capacity additions? Or can you still focus on productivity improvements?

Both, but I would say the majority of our factories are capacitized to support our three year growth trajectory. We have certain bottlenecks, we’ll address, the CapEx spend will not be of the magnitude that we would let's say to be a major announcement $50 million coder, $100 million new factory. They would be more -- some of our sub-operations, $5 million, $7 million, $10 million type investments, I'm confident. And we're looking at those right now and planning for them. They will be in our CapEx plans. The double digit growth in Framing Systems, that’s probably where we’ll be making those investments. So for the most part, fly below the radar screen of the kinds of numbers you may be thinking of. Productivity investments could be substantial and only would be a marked on with significant return on investments.

Does Sotawall or EFCO in isolation, require much CapEx spending?

No.

Okay.

Of course there’re CapEx opportunities, our teams are – Jim and I will make those bets. I highlighted that a moment ago. Some bets that I think the prior period this was unwilling to make because of where they wanted to focus their cash. But as far as -- the investments would be more on the productivity side versus capacity.

And then lastly, can you remind us how -- what the market opportunity for your over-sized glass businesses is. And is there a -- until you get to a certain level of production, is there sort of a drag on earnings from the oversized start up?

No, the drag on earnings in the quarter was associated with the rearrangement of factory. But from here on forward, the margin will fall through as we book the revenues. We're gaining -- we’ve already achieved our F18 revenue awards. The awards that we will revenue this year that we committed to our Board of Directors when we made this investment we’re actually well beyond that. But in a lot of business we're getting, John, comes because we're capable of the oversized. Even though, three quarters of the project fits within the size capability that we had prior. But we were starting to lose business, because we couldn’t do the podium, or we couldn’t do a particular elevation, so we lost the entire order. For years, we're able to convince people to go back to a design within our capability that became harder. This is a really good thing for us; the larger the windows the higher the window to wall ratio, the more glass content on the same size building, more glass, less panels, more less, less stone that’s good for us.

Okay, Joe. Thank you much.

Thank you. Operator, we have time for one more question. We have Annual Shareholders Meeting, so I’ve got a hard stop in nine minutes. And I would like to wrap up with one more question please.

Thank you. Our last question comes from the line of Julio Romero with Sidoti and Company. Your line is open.

So I’ll keep it bit brief. Just to touch on EFCO, I understand mid and small sized project exposure favorable in terms of the more stable revenue stream. Could you give some additional color on how EFCO positions Apogee in the institutional category of non-res construction versus their current leverage to the commercial and office segment? May be touch on exposure to schools, hospitals and the advantages you see of working on those projects versus office.

Julio, this is Jim. I’ll cover that. So that’s a great question, because one of the strategic fits that we were attracted to at EFCO is they are very strong division, particularly in the education market. When we look across our Framing Systems business, one of the areas where we had opportunity in terms of product expansions was in kind of a more, I’ll call it, standard but it’s -- I don’t want to minimize the complexity and engineering component. But products that are really attractive and have the lower and secondary education market as opposed to the university type sector. And the EFCO business has an existing very strong position with products that they have, in some cases, products that we didn’t have, particularly to that market across the sector. One of the other areas that is separate from the institutional sector is in terms of their historic product offering. As you know, we’ve really been focused on driving our retrofit business and they have some differentiated products that we didn’t have that really complement our efforts in the retrofit area. Some of which are tied to the education sector, but then also more broadly in other institutional, the government type buildings and private buildings as well.

Thank you, Julio. Okay, Kelly, let me wrap up here. Hey folks, listen, thank you for calling in. I told you we would explain the adjustments. I would tell you that we hear from you guys. If I’ve gotten any feedback is that we provide probably more guidance or more business explanations than most. If we’ve gotten some criticism from you, it's perhaps we don’t explain adjustments well enough. I hope we’ve scratched that itch today. We’re prepared to -- we will be talking with many of you in follow-up calls. We’ll be happy to continue to go into all the detail you need to understanding these adjustments, so you don’t guess incorrectly. I think you can tell I am very passionate about our opportunities, about our end market. I am passionate about Apogee, I love this place, and the best is yet to come. Have a great day, everybody. And we’ll talk to you soon. Thank you.

Ladies and gentlemen, thank you for participating in today’s conference. This does conclude the program and you may all disconnect. Everyone, have a wonderful day.