Good day ladies and gentlemen, and welcome to the Q2 2019 Apogee Enterprises 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] I would now like to introduce your host for today’s conference call, Mr. Jeff Huebschen. You may begin, sir.

Thank you, Kevin. Good morning everyone and welcome to Apogee Enterprises fiscal 2019 second quarter earnings call. With me today are Joe Puishys, Apogee's Chief Executive Officer; and Jim Porter, Chief Financial Officer. I would like to remind everyone that there are slides to accompany today's remarks, which are available in the Investor Relations section of Apogee's Web site. During this call, we will reference certain non-GAAP financial measures. Definitions of these non-GAAP measures and the reconciliation to the nearest GAAP measures is provided in earnings release we issued this morning, which is also available on our Web site. Also I would like to remind everyone that our call will contain forward-looking statements reflecting management's expectations, which are based on currently available information. Actual results may differ materially. More information about factors that could affect Apogee's business and financial results can be found in our SEC filings. And with that, I will turn the call over to you Joe.

Thank you, Jeff and welcome to Apogee. Jeff joined us recently to lead Investor Relations and he comes to us with a wealth of experience and we’re happy to have him here. By now, everyone has had a chance to read our press release and look at the numbers. Strong market conditions helped us deliver solid organic growth, our adjusted earnings per share in line with a year ago, and increased cash flow. Our Architectural Framing Systems, Architectural Services, and Large Scale Optical segments all delivered solid results and in line with our expectations. However, the Architectural Glass segment faced significant challenges as it ramped up production to meet faster-than-expected demand increases. This caused the business to fall well short of our expectations for the quarter and to impact our full-year outlook. This morning, I would like to discuss; one, the issues that impacted our Glass business and the plan we have in place to resolve these challenges. I will review the quarter's highlights across the rest of our businesses and discuss Apogee's positioning for the future and then I'll turn it over to Jim for more details on the quarter and our outlook. So, starting with digging into the Glass segment. Over the past few quarters, we’ve been anticipating a rebound in our Glass business. As we saw increased bidding and customer commitments that we prior commented on, we continued to win in the mid-size market, and we regained share in large projects. This recovery played out as we had hoped and in an inherently lumpy business, it happened even more abruptly than projected. We saw surge in customer demand over the last 90 days, making the second quarter the Glass segment’s strongest quarter of orders in over 15 years, including prior peak levels. We saw strong orders across…

Thanks, Joe, and good morning, everyone. I will begin on Slide 8, with our consolidated results. Consolidated revenue was up 5% driven by strong growth in Architectural Services. This was partly offset by a decline in Architectural Glass. Total company operating income increased to $28.7 million primarily due to increased volume and higher productivity in Architectural Services along with good performance in Architectural Framing Systems and Large-Scale Optical, partially offset by the profit decline in Architectural Glass that Joe discussed. Adjusted operating income was $29.7 million, which adjust for the amortization of short lived intangibles from the Sotawall and EFCO acquisitions. Adjusted EBITDA was $42.1 million. Earnings per diluted share were $0.72 compared to $0.60 in the prior year period. Adjusted earnings per share were $0.75 even with last year. Now I will turn to the segment results, which are on Slide 9. In Architectural Framing Systems, revenue of $189.9 million was roughly in line with the prior year. Adjusted operating income improved slightly in the quarter to $19.4 million with adjusted operating margin of 10.2% compared to 10.1% last year. We continue to have good momentum in the Framing Systems businesses that have been in our portfolio for more than two years. Architectural Framing Systems also had another strong quarter of orders led by some nice project wins in the longer lead time portions of the segment. Segment backlog kicked up to $428 million. Joe already described the factors driving results in Architectural Glass. Segment revenue was up 15% sequentially compared to the first quarter marking the segments first quarter of sequential growth since the end of fiscal 2017. In relation to the prior year, revenue declined 9.5% to $88.1 million. As Joe described, orders increased dramatically beginning early in the quarter reaching a multiyear high point for quarterly…

All right. Thanks, Jim. So as I said earlier, we are not happy with the operational issues in the Glass segment this quarter. This was a bump in the road, a significant one I admit, but it is nonrecurring. The strength of the rest of our businesses were on display as we delivered solid organic growth, in line year-over-year adjusted EPS, higher cash flow despite the significant margin shortfall in Glass. And I'd like to reiterate that the challenges in Glass segment were due in part mainly due to the strong customer demand for our products, a surge in orders and significant sequential revenue growth, which all point to the segments long-term underlying strength. In the third quarter, we expect our Glass segment will improve operating margins by several hundred basis points compared to Q2 and Q4 will similarly be better than Q3 by several hundred basis points margin. Industry fundamentals remain very positive, which together with our significant backlog and strong order activity give us good confidence in our direction for the rest of the year and into the future. Finally, cash flow and our balance sheet remains strong which positions us well to deliver long-term shareholder value. With that, I would like to open-up for questions, and Kevin, if you would please do so. Thank you.

[Operator Instructions] Our first question comes from Eric Stine with Craig-Hallum.

Good morning, everyone.

Good morning.

Good morning.

As you look or think about the business over the next couple quarters, I think you called out Framing and that’s a component in fiscal '19 due to timing. Do you think that in 3Q, 4Q, you will largely have the Architectural Glass, the issues you’ve experienced wrapped up and pretty much back to where you want them to be entering fiscal '20, or do you expect there to be a little bit of an impact in fiscal year '20?

Yes, Eric, I will take Glass, and Jim will comment on Framing. Yes, absolutely, we expect to end the fourth quarter -- the margins in the fourth quarter should be back to normal or very close to normal. We will certainly end the full -- the year, let's call it, the February results, I would expect to be at least at what we would have expected going into this year. I did mention several hundred basis points of margin improvement in Q3. Obviously, I’m monitoring it every week with our business. They have done a good job to address the situation. The month of September is showing good improvement over August, and we won't be there by the end of the third quarter, but we will be by the end of the fourth quarter and I’m hoping that the fourth quarter, full quarter operating margins is substantially close to where we need it to be certainly by the end of the year, the run rate.

Okay.

And Eric, it's Jim. I will just comment on Framing Systems. Similarly, the timing of the work that we have, Q3 is a bit lighter, but we see the run rate and the work ahead of us from Q4 carrying forward into fiscal '20.

Okay. Maybe a good segue, just you did give the visibility that you’ve got in the Services business, '19 booked and fiscal year '20 virtually booked. Just wondering if you can give similar commentary, I know you have in the past, on the -- on Glass and Framing, and certainly on Glass just given the level of orders you saw in this quarter or you've seen over the last quarter plus.

Yes, order to delivery lead times are substantially lower in those. Glass and most are for the six Framing Systems businesses. I mentioned it briefly. Our backlog in Glass increased in the quarter, obviously partly due to our problems, but also as I mentioned, we had substantially higher orders than any order in the last 15 years and virtually in the history of the business. That continues, we’ve already had a strong start to September. The business is starting to work down its lead times and I would say they feel better about fiscal 2020 than they’ve about any next year out at this time in the fiscal year. So, we feel pretty solid about fiscal '20. We did have lower revenues in Q1 and Q2. Obviously, the comps next year are going to be substantially easier, but the overall state of the orders and the bidding activity is substantial. I mentioned it. We’ve won back some of the share in the large project segment. That was welcome, but it did come with pretty short notice to be frank about it, and that bodes well for next year as well. In the Framing Systems segment, four of the six businesses are very short order to delivery. Bidding and award activity is very positive. The headwinds, we’ve achieved this growth this year in spite of some substantial headwinds from Sotawall's revenues due to the orders last year. Their backlog is up substantially this year. We will see solid growth in Sotawall's revenue stream next year. And again, we are starting to see good award activity in Canada, which is new for us since we acquired the business. It's been primarily Northeast United States. So, Sotawall is a long lead-time business and that bodes well. The others are too short, I would say, to really address fiscal '20.

Yes, okay. Understood. Maybe last one for me. Just on the -- on EFCO and the legacy projects that you need to work through. Just an update, I mean, are you still thinking that, I believe, one, you are close to being done; and another, if you look out a few quarters, that will be complete as well?

Yes, that is still true. One is nearly complete. The other one will really start, frankly, to revenue in second half of Q3 and then frankly for about two years, as we will be totally focused on production. I think we've told you all that EFCO is solely responsible for building the system. Our Services business will be doing the installation and installation management over this couple year project.

Okay. Thank you.

We expect low margins, but it is expected to be profitable. Thanks, Eric.

Our next question comes from Chris Moore with CJS Securities.

Hey. Good morning, guys. Joe, you talked a little bit -- yes, good morning -- about geographic expansion. Can you maybe get a little bit more specific there? And is there any fear in terms of, from a labor perspective or anything like that, or kind of any challenges that you see on that front?

Yes, we’ve done painstakingly detailed analysis of the workforce where we are talking about, I'm obviously not going to get into specifically which business and which location, but these are very profitable businesses for us. They have handled internal expansion quite well up till now with investments in the regions we're looking at. Things we’ll be talking to our Board about are in some of the best -- better labor markets out there. Our biggest challenge, frankly, as a company has been Southern Minnesota. Some people have asked, why did you shut that factory down in Utah, if you saw this coming? That's a fair question. But frankly, the capabilities of the Utah factory would have only had a minor help in our second quarter struggles to meet this ramp up in production. So that wouldn’t have really helped us. The issue is the labor force in Southern Minnesota frankly. We’ve made some adjustments to our pay scale. The team has come up with some innovative recruiting techniques, and our expansion plans would be in other regions of the U.S., in both -- in all of our segments.

Chris, as you know, geographic expansion is an important strategy really across all of our businesses and in our process for looking at those, availability of labor is frankly the top criteria in all the evaluations that we look at for expansion.

And Chris, we are talking about internally investing in equipment, processes in our very profitable businesses as opposed to acquiring a stranger in that particular part of the world or U.S. And I’m sure the investors will respect that and appreciate it.

Got it. That’s very helpful. You went through it, Joe, but I missed it. Just in terms of the EFCO margin progression, so -- I know you are talking about being profitable second half of this year in EFCO. It is -- from a kind of trajectory standpoint, is it just going to be slow and steady over the next couple of years? Is there any point where that likely would spike?

It will be slow and steady. We are in the midst of an announced investment in the factory there that the prior leaders of the business under the prior parent were trying to get approval for. I understand why the prior parent didn’t approve it, based on their long-term plans to exit that non-residential business called EFCO. We have approved that and we -- it's been in the press that we are adding some substantial cost or investment for the factory in Monett, Missouri and that will be done in about the May timeframe of next year, May, June. And we will really start to amp up the productivity improvements in that business. I would say slow and steady until then we still have purchasing synergies we're driving and over the next three years, my goal is for a couple hundred basis points of margin expansion each year.

Got it. That’s helpful. I will jump back in line. Thanks, guys.

Thanks, Chris.

Our next question comes from Brent Thielman with D.A. Davidson.

Hey. Thank you, good morning.

Hi, Brent.

Joe, on Glass, with lead times shorter and orders pretty strong here, I guess, I’m confused why we wouldn’t see faster growth this year even with the inefficiencies. Is that because you are picking up more of the larger-project business?

No. You will see -- we’ve been on a downward trajectory on orders for the last four quarters prior to Q2. We had been talking about the wave was coming. You would think we would have been better prepared and it's unfortunate that it caught us by surprise, the magnitude and then it started to snowball. And if you've ever run a factory when you're overwhelmed with business, it starts to become a fire drill and a crisis and it's unfortunate. It -- we are working out from under it. We’ve seen improvement. But the main issue was in June, where the avalanche hit. July was slightly better. August was slightly better. September will be better. We will see nice growth in revenues in Glass in the second half of this year and next year. So, the revenue growth is coming, Brent. The reason we didn't see it in the first half of the year was simply the flow of orders in the last two quarters or last three quarters of last year and the first quarter of this year, it's come roaring back. As I mentioned, we don’t really publish backlog in that business. Typically, we have always historically strived to be a 12-week lead time business. We managed that down to 6 to 8 weeks consistently, which allowed us to win share in the mid markets. The avalanche of orders have driven up the lead times and we are fighting to get those back in the next 90 to 120 days. And as we manage that backlog down, you will see pretty solid revenue growth in the second half of the year in Glass.

Okay. And then I guess given some of the challenges there, are you -- I mean, are you deliberately kind of laying off the gas pedal in terms of accepting new orders? And I guess, also in addition to that, given what you are seeing out there, do you need to think about another round of hires in response to demand?

They continue -- let me work backwards, they do continue to hire. They’ve learned a lot. We -- a lot of the people we've hired are -- English is not their first language, so we’ve actually had to amp up our recruiting and hiring of translators. That’s in place. We still have more hiring to go for the second half of the year, but let me be clear, Brent, we're clearly beyond the blip, the crisis, the substantial bump in the road. The business has learned how to improve. We’ve been bringing other resources in from Apogee. I’m fairly confident in the hiring plans for the second half of the year as we move forward.

Okay.

And you asked something before the hiring, I forgot, I’m sorry.

Hey, Brent, it's Jim. So we continue to take orders. I think, at the end of the day, some of the kind of mid-market work requires shorter lead times. As Joe said, we’ve made improvements to that and we are still largely competitive with kind of regional fabricators, but we continue to actively pursue all potential work that’s out there.

Okay. And then one more and I will get back in queue. I guess within that segment we’ve seen sort of a reversal in the dollar again. It doesn't seem like it's impacted the order trend by any means, but just curious if that’s changed any competitive behaviors out there?

Yes, I mean, we continue to flub around in the $1.15, $1.17 area, U.S. dollar to the euro, which is the most important exchange rate issue for us. I would love to see it go back in the $1.25 range. It's not -- nothing has changed because of where it is. You know, Brent, the biggest issue, even really good competitors that we respect greatly, it is a challenge to have such a long logistical supply chain. It does come with unanticipated costs, hidden costs and when you complete a project and realize the total delivered cost wasn’t quite what you expected, if you have to expedite glass, it's extremely expensive. It may not be the glass fabricator's fault. Somebody has to cover that cost. We started to see some customers that were the first to leave us to test offshore glass due to the cheap price come back to us in a fairly big way. So I would say it's balanced. We’ve gained some of the share back, we like our position. This issue helped us become better in the mid-market, this second quarter, blip aside. We are learning from it, but we’ve become better in the mid and small project size with consistent deliveries. We’ve got to do a better job of balancing being capable to take on $6 million projects and $60,000 projects as well. And I think the business is well prepared to do that and we are getting -- we are very close.

Okay. Thank you.

Thanks, Brent.

[Operator Instructions] Our next question comes from Jon Braatz with Kansas City Capital.

Good morning, Joe, Jim.

Good morning.

Hi, Jon.

Just a follow-up on that last question. In the last -- in this past quarter, you hired 300 new people in Architectural Glass. What do you think going forward the magnitude of the hiring number will be relative to the 300 you did in this past quarter?

Yes, it's -- maybe a third of that. One of the issues we had, Jon, was to get to net the 300 adds, we probably hired actually about 600. It's tough work. It's not simple. And by the way, that 100 we still have to add is over both the Georgia and Minnesota facilities, but it's a challenge. And as I said, should we’ve been better prepared? We knew we had a tight labor market. That was not a surprise. I would say in the last year, maybe more the labor market, since the last time we had to go through a hiring effort like this, the market has gotten substantially tighter. We, like all manufacturers, are facing a labor shortage and we just missed it. We did not anticipate the challenges of getting qualified workers. Those that make it through the first 90 days stay and they’re good employees, but there's a ton of turnover in that first 30 days, which cost us dearly. I’m not anticipating these kinds of issues in Q3 or Q4, although we still have some hiring to do, but we’ve got the center of gravity behind us now.

Of the -- when you look at the 400 new hires you might be making or will make …

Counting the 300 we already have? …

Yes, yes.

… not 400, is it?

Yes, yes, exactly. As the market stabilizes, two questions. Number one, will you continue to need those 400? And then, secondly, I guess a bigger question is, over the last couple of years you’ve invested heavily in automation productivity and so on in the Glass business. Why wasn’t that better able to handle the incoming orders more efficiently?

Well, that’s a fair question and you won't like the answer, but the truth of the matter is, it would have been substantially worse if we had not made the investments we’ve made in automation. The automation is expensive. It does have returns. When you see the impact of the quarter, you could argue that the returns are probably better than we had modeled. We have substantial opportunities. Those that have walked our factory have seen the automation on the front end kind of in the cutting area, and then the back end where we build IGs, insulated glass units. There's a substantial opportunity in the middle of the factory. It's not cheap. We evaluate it. I do believe that you asked a question I expected earlier in this call, is how are we going to manage when there's a downturn in orders? We don’t anticipate -- we still feel we are going to continue to see end markets that slowly grow, bounce along the top, continue to grow. But within that, I would say within this up market, we are seeing a trend towards more egregious peaks and valleys. So, as you have -- if you plot out the last 3, 4 years, you will see this trend up, but you start to see the intra quarter, the intra year ups and downs have very violent peaks and valleys. It's kind of the overreaction to news in our world, in our markets. The overall trend is good, but we’ve to get better at managing the short-term peaks and valleys. We took a week out of production in our Q1. That was a mistake. We should not have done that. The -- hiring those people back turned out to be more challenging. We will be more careful. We may be not micromanaging the P&L in one month at the expense of the next, so we will look at that. We do still have a substantial amount of temporary labor that we can use to more appropriately flex our workforce and we continue to work on more creative hiring practice. And as I mentioned, we made some payroll adjustments for certain job classification to help us where we are having the highest turnover. So, all in all, I do feel good about our ability to manage this going forward so we don’t have to explain operational mis-performance going forward.

So, would you …

We do, Jon, continue to have projects that are still in the process of being implemented in additional automation so that with the long-term eye of continuing to do whatever we can to automate.

Okay.

Jon, one metric I will give you, I will let you ask all your questions, …

Okay.

… our orders in Q2 were 50% greater than the orders of both Q4 and Q3. So -- and those quarters had come after a few quarters of decline. We should have kept our workforce in place if we had seen that we were going to be -- our run rate for orders in the second quarter would annualize out at revenues 20% higher than our record year. So we don’t expect every quarter to be this high, but it does show you. And it's a shame at a time where we should have been minting money, we were creating productivity problems with quality and rework, and it is a shame. It's embarrassing. But like I said, I believe we're on the right path to have this behind us very quickly.

Ultimately, Joe, would you consider some of the 400 new hires to be temporary?

Not at this time. Certainly, we’ve an ongoing temporary labor force that’s really outside of the new hires …

Okay.

… that we would use to flex our workforce.

Okay. All right. Thanks, Joe.

Thank you.

Our next question comes from Brent Thielman with D.A. Davidson.

Hey, guys. I’m not going to ask about Glass. Just on the Framing Systems margins, and it does look like they’re bouncing back after the last couple quarters. Just anything unusual? Is this pretty solid evidence you are surpassing some of these issues at EFCO?

Yes. So let me comment, just listen, there are six businesses in Framing Systems. They are all in the related markets, but every business will have some fire on eight cylinders, some fire on seven. You always have red lights and green lights in a particular quarter. All in all, we like where the business is going. Our most profitable businesses are growing the fastest. The headwinds at Sotawall will be behind us. I’ve got a new leader, of course, that started earlier this year at EFCO. He's doing a terrific job. We put a brand new -- we put a new sales leader in, a proven executive from my team. He was running our retrofit initiative. He did a fantastic job with that, built a team to take over. He ran our Wausau sales for several years. He worked in our Harmon services business before that. I respect him more than anybody and he is now leading our effort at EFCO to help us drive top line so we can better leverage the operational improvements we're making. So I feel really good about the long-term for Framing Systems. Short-term, there will always be puts and takes within a quarter anytime we have six different businesses.

Yes and really the drivers in our Architectural Framing Systems segment are volume leverage and project selection and productivity. And so we see that, particularly, as we look to the fourth quarter, where we really see more of the volume leverage to go through and be able to help the project selection is really a key attribute, primarily in our longer lead-time businesses where we’ve had some of that move out. So, Q4 and into next year, that segment is really well positioned.

Okay. But the problem contracts at EFCO, you are effectively surpassing those now?

Yes. Yes. As Joe described, the one project is -- we are like 98% complete. And so, I mean, that’s just a drag because it's a little bit of work that has costs associated with it. But overall, it's really the -- and the other project is really just starting. And so it's really that core business and getting -- we are making nice progress on the productivity initiatives, continuing to drive to grow the order intake on that core kind of bread-and-butter business, that was their business. As we look later in the year, we start to see some momentum with that.

The project Jim referenced that's just basically starting, we’ve incurred a lot of cost and headwinds to get to this point. So, this is a big milestone where we are pretty much now past or getting past the engineering and hopefully can totally focus on producing units and I’m more comfortable with that. Getting to this stage has been a battle. We're not quite there, but we are almost there and I expect in the third quarter, we will be focused on producing instead of designing.

Okay. And then just one on Services, Jim, I don't think you said what portion of backlog gets done this year and then what percentage into fiscal 2020?

Yes. It's about little less than 50% this year and then the rest beyond that. Some of it, I don’t have the specific breakout between fiscal '20 and '21, kind of quarter-to-quarter, that moves around. But this year is fully booked and next year is largely booked.

Okay. Thank you.

Thanks, Brent.

And I’m not showing any further questions at this time. I'd like to turn the call back over to Joe.

All right, Kevin. Thank you. And to all of you, I appreciate your time and patience today. I realize we had a self inflicted wound in the quarter, which contributed to our miss to your expectations and ours, but as I said, this is an episodic issue. It's not a symptom of the health of the Glass business. We will restore that to its rightful place of double-digit operating margins before this year is out. We look forward to further engagement with many of you that are on this call over the next day or two and over the course of the quarter and we look forward to delivering better results in all of -- in our Glass segment and the rest of Apogee as we go through the third quarter, and I appreciate your time today. Thank you very much.

Ladies and gentlemen, this does conclude today’s presentation. You may now disconnect and have a wonderful day.