Ladies and gentlemen, thank you for standing by, and welcome to the Apogee’s Fiscal 2020 Second Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions]. I will now like to turn the conference over to speaker today, Jeff Huebschen. Thank you. Please go ahead, sir.

Thank you. Good morning and welcome to Apogee Enterprises fiscal 2020 second quarter earnings call. With me today are Joe Puishys, Apogee's Chief Executive Officer; and Jim Porter, Chief Financial Officer. I'd like to remind everyone that there are slides to accompany today's remarks, which are available in the Investor Relations section of our Web site. During this call, we will reference certain non-GAAP financial measures. Definitions of these non-GAAP measures and a reconciliation to the nearest GAAP measures is provided in the earnings release we issued this morning, which is also available on our Web site. I'd 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'll turn the call over to you, Joe.

All right. Thanks, Jeff, and thank you to everyone who has joined us this morning. Overall, this was another solid quarter for Apogee. We delivered on our commitments and made very good progress in a number of areas. This morning, I’d like to discuss the highlights in the quarter and the trends we are seeing across our businesses, talk about the progress we’re making on several key initiatives to advance our long-term strategy, and then I’ll turn it over to Jim for more details on the quarter and our guidance. Regarding the second quarter, highlights, and trends, let me start by saying first we made significant progress toward completing the last of the legacy EFCO projects that we acquired. We’re on track with our schedule and cost estimates. We expect the building will be largely enclosed by the end of October, and as is extremely normal for large construction projects, we will have residual activity that will stretch over the next few quarters. We’re also continuing to pursue potential cost recoveries, some of which we could see later in the second half of this fiscal year. More broadly in Architectural Framing Systems, we are encouraged by the trend line in this segment with sequential revenue growth and margin improvement in each of the past few quarters, in spite of incurring costs associated with the supply chain synergy project I’ll discuss shortly. In particular, the EFCO business is starting to demonstrate its long-term potential performing nicely in the quarter and year-to-date. The EFCO team has made significant progress increasing productivity, quality, controlling its costs and improving pricing. Later in my commentary, I’ll speak more about some strategic moves we’ve made to drive further progress in margin expansion in our Framing Systems segment. Architectural Glass has delivered 13% sales growth and more…

Thanks, Joe. Good morning, everyone. I'll begin with our consolidated results, which you can see on Page 5 of our earnings presentation. Total revenue came in at $357 million, down slightly from last year’s second quarter with strong growth in Architectural Glass offset by the expected lower revenues in Architectural Services. Operating margin of 7.7% was down from adjusted margin of 8.1% in last year's second quarter. Lower margins in Architectural Services and Framing Systems were partially offset by improved margins in Architectural Glass. EBITDA came in at $39.2 million compared to adjusted EBITDA of $40.6 million in last year's second quarter. Net interest and other expense increased to $2.2 million on higher debt levels and the tax rate of 24% was comparable to last year’s level. Putting it altogether, earnings per share were $0.72. I’ll now turn to segment results on Slide 6. Framing Systems revenue was $187 million, down slightly from last year's $189 million. Operating income was $15.5 million with an operating margin of 8.3% compared to adjusted operating margin of 10.2% in last year's second quarter. The lower margin was due to less favorable project mix as well as cost associated with initial steps of implementing the supply chain synergy projects that Joe mentioned. These costs add about 100 basis point margin headwind in the quarter for Faming Systems. Architectural Glass had a strong year-over-year improvement over an easy prior year comparison. Glass revenue grew 13% to $99 million reflecting increased volume and a more favorable sales mix. Operating margin improved to 6.5% compared to 2% last year primarily driven by operating leverage on increased volume and improved productivity in our factories. Glass segment margins were negatively impacted in the quarter by about 100 basis points from start-up costs related to the new facility for the…

Thanks, Jim. To wrap up, we were pleased with the progress we have made through the first half of the fiscal year. We’re delivering on our commitments and we see a lot of positive momentum across our businesses, and we’re taking action to sustain this momentum with a number of strategic initiatives that should contribute to revenue growth and margin expansion as we look ahead to next fiscal year. These initiatives are underway and some are already having a positive impact. I continue to believe the future is bright for Apogee. We have a terrific team. Our business strategy has strengthened our company in an exciting set of opportunities ahead of us. With that, I’d like to open it up for your questions. Sonia, if you could please do so. Thank you.

[Operator Instructions]. Our first question comes from Chris Moore of CJS Securities. Your line is now open.

Hi. Good morning, guys.

Hi, Chris.

Good morning. Maybe, Jim, just start again on the – talk about kind of the puts and takes in terms of reaching the higher and lower end of EPS guidance for this year?

Yes. So the two primary factors are really going to be the kind of timing of the work that we have in front of us that we’re pursuing and the ability to fill in, in the short lead time parts of the business. And those are going to move the needle in revenues and leverage and flow through in the different businesses associated with it. And then the timing of the potential benefits that we see from these initiatives coming in, we’re trying to ramp up each of those initiatives as quickly as possible and trying to generate savings within this fiscal year to offset the costs associated with it, which is more of a headwind in the third quarter before the benefits start to kick in. But depending on how rapidly we’re able to see some of those benefits come into this fiscal year, that’s a driver that could push us to the higher end. The lower end assumes that we have more of the costs and we don’t have the revenue upsides.

Got you, thanks. And then on the new Glass initiative, maybe Joe, can you just talk about kind of who’s the competition there? Are there any unique challenges from a labor standpoint or otherwise associated with this?

Yes, Chris, again, I have been a little bit quiet on this for strategic reason or competitive reasons, and I’ll continue to limit my comments. We are actually launching this quarter that we’re in right now Q3, so there will be more for me to say as we go forward. But this will allow us to compete in the regional market where very short lead times are required. We have a very automated facility. The people, which is far more limited than we’re used to in our other factories is fully in place. We’re using existing leadership from the company at the top of this operation, and so we’re confident we have the leadership team and the factory workers in place, and we will be able to compete in this very quick, less than two weeks lead time from order to delivery marketplace, and it’s been something I’ve frankly been envisioning for our company since I came. This investment is timely for us. We’re obviously vulnerable to global competition on the large monster towers that are not only highly volatile from an end market and revenue stream, but also such long lead times that international players can’t compete for that which is not possible in this rapid short lead time business, which is over half the market as this segment. So, it’s a regional play for us. I’m not going to get into our competitors. We’re going to do our best to be a very good competitor ourselves in this space.

Chris, we strategically pick taxes which is a very big and robust construction market, and there’s short lead time, smaller project market has the opportunity to differentiate based on predictability, quality, and service levels which our company has a reputation for and we think will allow us to be very competitive.

Got it, I appreciate it. I’ll jump back in line. Thanks, guys.

Thanks, Chris.

Thank you. And our next question comes from Eric Stine of Craig-Hallum. Your line is now open.

Good morning, everyone.

Hi. Good morning, Eric.

Good morning. Maybe and I understand that you may not share a whole lot of details here, but I know you picked Texas first. I mean, is this something that we should think of you kind of taking a measured approach as you look at other markets? And when we think about the type of investment that is necessary, you kind of called out the 4 million to 5 million, I mean is that roughly a good way to think about what it would mean per location if you were to expand beyond Texas?

Yes. Well, Eric, I’m not going to comment on our strategy going forward. Obviously, as I mentioned, it’s a regional play. I think these initial P&L start-up costs are indicative of what it requires. Capital layout is much more modest than a large glass operation and it depends on whether you’re building a new building or renting a facility that exists. They are certainly within our capital wheelhouse [ph] if we chose to do further regional expansion.

Chris, at a full facility, I think we’ve talked about this before, I mean total capital cost is going to be roughly $20 million. And this start-up cost, we’ve called out, I think there’s a certain degree of those costs which are kind of the first time you do something like this that we would expect that we’d be able to learn from in the future.

Got it, okay. And then maybe since this market’s a little bit different than where you have historically been, is there a retrofit component to this or how does this maybe play into some of your retrofit goals?

Yes, we could use this facility to supply glass for a retrofit. We are planning to use this facility to supply glass to our existing Framing Systems businesses that will include pulling through the retrofit initiative, which continues to be a very strong initiative for us and we have passed and will pass the $50 million order input from retrofit or renovation this year. And I’m very pleased with it. And this business will contribute to that. It’s not the driving force behind it though.

Okay, fair enough. Maybe last one for me, just going back on some of the operational challenges that goes back a number of quarters. I know last year – I’m sorry last quarter, you kind of said that some of the hiring challenges in dealing with the high demand in glass that that was kind of a work in progress. Another solid quarter, is this something that you would still characterize it in that way or do you think it’s kind of something that you’ve put behind you?

Yes, we’ve pretty much put the hiring issues behind us in glass. When I referenced some operational challenges in the past several quarters, I was clearly referring to the projects we acquired and acquisition of the EFCO business, which I’ve commented on in this call, and last summer the issue we had with the glass operations that is behind us and we’re at the staffing levels we need to meet current demand in glass.

Okay.

Hiring across the U.S. is still a challenge in general. Most of our businesses, we’re at levels. It’s one of the more challenges all of us manufacturers in the U.S. have is finding talent. But it’s not something we’re calling out as an operational concern for us. And the big one was glass and that is behind us.

Okay. Thanks.

Thanks, Eric.

Thank you. And our next question comes from Julio Romero of Sidoti & Company. Your line is now open.

Hi. Good morning, everyone.

Hi, Julio.

Good morning.

So wanted to ask about the strategic growth initiative in glass. Historically, when you’ve talked about that shorter lead time in market from – you’ve talked about education, healthcare as more of that type of work and less office type of projects. Is that the same way we should think about any future work that you’d be targeting in Texas?

It really covers all segments. What it covers is really kind of smaller office, if you think more like three or four kind of storey type office building, but it really is geared to service all segments of the marketplace people. Store front less than – think of buildings that are generally less than five stories. Again, that’s about half of the Architectural Glass market, whereas our existing glass business generally is focused on buildings above 10 stories. The customer base is similar. Many of the general contractors and glazing contractors that are glass, people sell to, it’s the same, but they’ve never been able to go to our existing facility for these kinds of lead times. Their operations are not set up for that with the kind of glass and the coatings we have traditionally delivered.

Got it, that’s helpful. And then on the supply chain synergy projects in Framing, can you talk about how long of a runway you think this could potentially be a driver for you on the margin side and maybe what kind of annual margin benefit roughly we can expect going forward for that?

Yes, Julio, really what we’re doing is when we look at this particular initiative is looking at kind of our extrusion, finishing, fabrication supply chain across three of the Framing Systems businesses. And we really in the third quarter we should be complete in terms of implementing this kind of new supply chain flow, if you will. And then should start to see benefits from it in the fourth quarter as it kind of ramps up. Fourth quarter tends to be a little bit softer seasonally, but that’s when we’ll start to see the benefits.

Got it. Thanks very much and best of luck in the back half of the fiscal year.

Thanks, Julio.

Thank you. [Operator Instructions]. And the next question comes from Jon Braatz of Kansas City Capital. Your line is now open.

Good morning, everyone.

Good morning, Jon.

Joe, just want to touch on the strong dollar and its impact on your business. You cut your guidance back a little bit in the Architectural Glass because of that. Are you just no longer competitive in many projects now or have you lost any business? Can you talk a little bit about the impact the stronger dollar is having on maybe the bidding and the activity levels that you’re seeing?

Sure, yes. Jon, we’re still – our Glass segment is still the market leader and share demand in the large projects greater than 20 stories, meaning commercial towers and 5 to 10 to 15 storey buildings, which we call the midmarket. Both those markets make up a little less than half the end market. They’re about equal. And our business is the largest demand – share demand player in that space. But we used to have such a large share demand in the large monumental projects that we had nowhere to grow, it was nothing but downside. And right now, at about $1.10 per euro – when I arrived here, we were even in the midst of just coming out of the Great Recession, we were exporting about $40 million of glass. The dollar and the euro was about a $1.30 to the euro at the time. I believe that could be more parity based on the economies in Europe and the U.S. at the times. We’re not counting on it going back there. As it started to go back from a $1.05 to $1.20 about two years ago, we started to see relief on this issue for us. And now that it’s kind of plummeted, it got below $1.10 a week or so ago. It’s back at $1.10 now. Yes, we’ve lost some large projects. I’m very pleased that our business has a very disciplined approach to selecting projects. We are not going to chase low margin work. Right now, our European competitors have an advantage on price with the conversion at these rates and European cost basis. And that’s why we’re making efforts like we have in this small projects move that we’ve been working on for many years. We’re still winning a lot of work in this space, but we’ve lost some share recently and we’ve seen some awards go to European competitors. They still have to deliver. We’re a great competitor. Jim highlighted our strengths in our glass businesses; our quality, delivery and how we stand behind our product. But first and foremost, we’ll remain disciplined in project selection. That is the forefront of why our Services segment has been doing so well is their disciplined approach to what projects they will go after. But we’re still the share leader in the large and mid projects as we stand here today and expect we will be going forward.

Okay, Joe, thanks. One other question. Obviously, you’re trying to recover some costs associated with the EFCO business and you talked about in the last quarter and this quarter. As it stands today, are you more confident about recovery of some of these costs that you incurred compared to maybe where you were three months ago?

Yes, I’m confident I wouldn’t say more or less. I’m very confident we will or I wouldn’t say it. I expect we will see some recovery in the second half of the year. Obviously, they’ll be non-recurring and we’ll call them out. But we deserve what we’re going after. We will fight hard. It’s not my operating people that are distracted. It’s kind of the corporate team. And I’m fine with that. And my operating team are focused on running the business, driving growth, executing the completion of that project we’ve referred to. But my confidence remains where it was that I feel just in saying I believe we will see recovery and we will see some this year. But these things take time and we’ll report it as soon as we have news to report.

Okay.

They are not – but I want to be clear, Jon, they’re not in our outlook.

I understand. Okay. All right. Thank you.

Thanks, Jon.

Thank you. And ladies and gentlemen, this does conclude our question-and-answer session. I would now like to turn the call back over to Joe Puishys for closing remarks.

Yes, thank you, Sonia. Team, I feel confident we did what we said we would do. We’ve hit our numbers. We remain focused on long-term growth. And while we can’t necessarily control the end markets, we still feel they are relatively balanced and we are acting on what we can control, which is our cost and margin expansion opportunities at Apogee. I look forward to another solid quarter when we talk to you in about three months. And good luck and we’ll look forward to follow up with some of you over the next few days and weeks. Have a great day, everybody.

Ladies and gentlemen, this concludes today’s conference call. Thank you for participating. You may now disconnect.