Q2 2022 Apogee Enterprises Inc Earnings Call

September 21, 2021

[music].

Good day and thank you for standing by welcome to the second quarter 2022, Apogee Enterprises, Inc. Earnings Conference call. At this time all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question. During this session you'll need a press star one on your telephone please be.

Today's conference maybe recorded if you require any further assistance. Please press Star then zero I would now like to hand, the conference over to your host today, Jeff fiction. Please.

Thank you Michelle good morning, and welcome to the Apogee enterprises fiscal 2022 second quarter earnings call.

With me today are time, silver Horn, Apogees, Chief Executive Officer, and <unk> Chief Financial Officer.

I'd like to remind everyone that there are slides to accompany today's remarks. These are available on investor Relations section of Apogees website.

During this call we will reference certain non-GAAP financial measures.

Definitions of these measures and a reconciliation to the nearest GAAP measures are provided in the earnings release, we issued this morning.

I'd like to remind everyone that our call will contain certain forward looking statements.

These reflect management's expectations based on currently available information.

Actual results may differ materially.

More information about factors that could affect apogees business and financial results can be found in our SEC filings and with that I'll turn the call over to Todd.

Thanks, Jeff and thank you everyone for joining us today.

This morning, I'll discuss our second quarter results and the trends, we're seeing in our business.

Share some insights about the rest of the fiscal year and provide an update on our strategy work.

Then that she will give more details on the quarter and our outlook after that we'll take your questions.

So let's start with the quarter results highlighted on page four of our slide deck.

I am very proud of our team's efforts this quarter.

We are managing a lot of moving pieces, but our team has executed well and we maintained positive momentum in our business even in a very difficult operating environment.

Adjusted margins and earnings improved sequentially compared to the first quarter.

This was led by large scale optical and architectural services.

Lso continued its strong recovery bouncing back from the Covid related disruptions that impacted it last year.

In architectural services delivered double digit growth in both revenue and operating income.

Architectural services also increased its backlog this quarter, an encouraging sign as this is the first backlog growth in that segment in the past year.

Cash flow continues to be very strong.

We had $48 million of cash from operations in the quarter, improving our already healthy financial position and we return cash to shareholders.

We did faced several headwinds that impacted our results this quarter.

As with many companies cost inflation is a significant issue.

Input costs are increasing faster than we can mitigate their impact given the speed of raw material price increases and the cycle time with some of our businesses.

For example, the price of aluminum, which as Apogees largest material cost category has increased 65% in the past year.

In fact aluminum prices are up nearly 20% just since our last earnings call.

We are also seeing meaningful cost increases for glass coatings freight and other direct and indirect materials used in Ah patients.

We do work to mitigate some of these through hedging and contracts, but the breadth and depth of the increases have outstripped much of that.

Additionally, we are experiencing some challenges in our supply chain.

The market for many materials.

With lead times are pushing out and some suppliers are reluctant to take on new business as we seek additional sources.

I would like to acknowledge the efforts of our procurement team and helping the company navigate through this situation.

Over the past two years, we've added new talent to build a stronger procurement organization aligned to our business segment priorities.

This team is offsetting some of the inflation impact from sourcing alternatives.

<unk> negotiations and driving cost savings and other categories.

Even with these efforts, we were not able to fully offset increased costs of materials and freight.

We are achieving meaningful progress in procurement as well as driving cost out in our operations, but this is not clearly visible in our results as inflation has outstripped. These efforts at a faster rate.

In addition to our procurement and cost efforts, we are taking price actions to mitigate the impact of both labor and material cost inflation.

As a reminder, many of our projects have long lead times. So there is a lag from when we take pricing actions until that impact shows up in our financial results.

The impact of cost inflation is hitting us now while the full benefits from pricing will not start to show up until the fourth quarter and into next fiscal year.

I'd also like to comment on our end markets.

We thought this was going to be a tough year for volumes, especially in framing systems and architectural glass and that is how things are playing out.

Nonresidential construction remains in a downturn.

The most recent data from the census Bureau shows that nonresidential and residential construction spending continues to trend lower.

Total non residential spending is down 11% from the pre pandemic high.

There are reasons to be optimistic about the longer term outlook in our markets.

Forward indicators like the Abi and construction starts have been positive for the past several months.

These forward metrics are indicators of the direction of our business 12 months to 18 months out into the future.

So it's likely a few more quarters before we begin to see these improvements show up in our business results.

Looking ahead to the rest of the year, we do not expect the challenges we faced this quarter to dissipate.

We will continue to take actions to protect our margins in the near term.

This includes a continued focus on execution.

Closely managing our controllable costs.

These price actions as appropriate.

In working to realize the benefits from our restructuring actions as soon as possible pulling more of these savings into our fourth quarter than originally planned.

As the year plays out we expect that these actions will offset a large portion of the headwinds we are facing.

So we remain confident in our guidance for the full year.

While we work to deliver results. This fiscal year. We are also positioning the company for the long term.

Our priorities for the year have not changed as shown on page five of our presentation.

Let me highlight a few of these.

First we will continue to focus on improving operational execution.

We certainly have more work to do in this area, but I am encouraged by signs of improvement across our company.

For example, our execution of the restructuring and business realignment is ahead of schedule and restructuring costs are coming in lower than originally planned.

We are also seeing a solid path for productivity savings in our <unk> glass plant.

This allows us to absorb the statesboro operations and still leave meaningful capacity to grow our glass business.

Even as we work to manage costs, we continue to move forward with our enterprise transformation efforts.

These are important investments that will help build a stronger foundation for profitable growth and make us a more efficient acquirer in the future.

The projects, we have underway will strengthened core processes and systems and provide new digital and back office capabilities across several areas, including finance human resources and supply chain.

Finally, we continue to make substantial progress on our strategy work.

Much of this work is now complete setting a clear direction for the enterprise.

As I've discussed previously this was a rigorous process that analyzed all aspects of Apogees business and the markets we serve.

We took a systematic outside in approach.

This included extensive input from key customers.

And detailed competitive benchmarking.

We analyzed our portfolio and mix of products services and capabilities to identify the best avenues for future growth.

And we evaluated how we compete to ensure we have the right operating models to deliver consistent profitable growth.

From this work we are building a detailed strategic roadmap to move apogee forward.

We still have work to do in building out detailed specifics of our plans, but I'd like to share a few of the key elements that are guiding the strategy.

These are outlined on page six in our presentation.

We are positioning to become the economic leader in the markets we serve.

This means clearly understanding our target markets and where we see the most opportunity to drive value for customers through differentiated products and services.

We are aligning our businesses to have clear go to market strategies, managing similar products and services together in a way that best meets the needs of our customers.

And we will have a relentless focus on operational execution driving productivity improvements to bring more value to customers and to improve our own profitability.

Going forward, we will emphasize return on invested capital is the key metric to guide our investment decisions.

This focus on ROIC will inform how we direct our capital allocation and how we manage our overall portfolio of products and services.

To enable future profitable growth, we're building centers of excellence for core processes and capabilities.

This will allow us to better leverage scale and will provide a strong backbone to support our businesses.

The enterprise transformation initiatives, we have underway are important parts of this effort.

Finally, we are adding key talent processes and tools to support our transformation efforts.

The actions, we announced in August our initial steps in executing our strategy.

We are refocusing architectural glass to emphasize segments of the market, where we see the most opportunity to provide differentiation and drive value.

The steps we are taking will also accelerate improvements in the glass segments cost structure and productivity.

We are realigning framing systems to bring more clarity in our go to market approach and increased focus on our target markets.

The changes in framing systems will also improve execution and importantly, reduce overall cost to raise our margin levels.

Finally, we are moving the soda wall business into architectural services to create a unified market offering for larger custom facade projects.

These actions begin our journey to accelerate profitable growth through focus simplification and improved execution.

We plan to share more details of our strategy and our upcoming Investor day.

Invitations for the Investor Day, I expect it to go out in the next couple of weeks.

With that let me turn it over to Ashish to provide more details on the quarter and our outlook.

Thank you Todd and good morning, everyone.

As Diane mentioned, we are proud of our team's efforts this quarter, maintaining the positive momentum in our business. Despite the significant challenges we faced.

Let me start with consolidated reserves on page seven of our earnings presentation.

Total revenue grew by 2%.

This was led by double digit growth in both architectural services and Lso segment.

As expected volumes were lower in architectural glass and framing systems. This was due to continued market softness and some supply chain challenges.

The quarter included $28 million pretax.

Pretax restructuring costs.

These are related to various actions, we announced on August 11.

$23.0 million of the restructuring costs were included in the cost of sales line on our income statement.

This reduced our reported gross margin in the quarter by 565 basis points.

$5.0 million of the restructuring costs were included in SG&A.

When we announced the restructuring we estimated total costs between 30% and $35 million.

As expected most of this was incurred in the second quarter.

We continue to expect that restructuring will be largely complete by the first quarter of fiscal 'twenty three.

Based on our progress to date, we now expect total restructuring costs will be lower than initially estimated.

We expect pre tax restructuring costs of approximately $5 million.

Incurred over the next two quarters.

Excluding the restructuring costs adjusted operating income was $24.0 million.

This was down from $25 million in the last year's second quarter.

The year over year decline was primarily driven by input cost inflation, which was a $20 million headwind in the quarter and higher labor costs, mainly resulting from the reversal of temporary cost actions, we had in place last year.

Additionally, we had approximately $8.0 million of operating costs related to enterprise transformation initiatives.

And finally, we had increased cost of health care insurance.

These cost increases were partially offset by improved pricing productivity and cost structure improvements and benefits from our procurement savings initiatives.

While the adjusted operating margin of five 4% was down year over year.

Margins did improve sequentially by 50 basis points compared to four 9% in the first quarter.

This was primarily driven by stronger performance in architectural services.

Our results. This quarter also benefited from reduced net interest expense driven by lower debt balances.

And a lower share count, resulting from stock buyback in the first half of the year.

We reported a net loss of <unk> <unk> per share.

This included the restructuring costs of $28 million.

Without this restructuring impact adjusted earnings came in at 53 per diluted share.

Similar to our margins and adjusted EPS improved sequentially, increasing by 26% compared to the first quarter.

Yes.

Let's turn to segment results, which are on slide eight.

Starting with architectural framing systems revenue of $150 million was slightly lower than the prior year.

This was primarily driven by lower volumes and supply chain challenges, partially offset by improved pricing.

Framing systems' reserves this quarter included $2 million of restructuring costs excluding.

Excluding the restructuring adjusted operating margin was six 9%.

That was lower than the prior year, driven by cost inflation and lower volume.

Partially offset by improved pricing and productivity gains, resulting from prior restructuring actions.

Sequentially margins improved from five 3% to six 9%.

Moving to architectural glass segment revenue was down 8%.

As expected this was driven by lower volumes.

The glass segment reserves included $21.0 million of restructuring costs.

This was primarily for asset impairment related to closure of velocity business, along with employee severance costs.

Excluding the restructuring costs adjusted operating margins were slightly above breakeven.

Margins were impacted by higher cost of glass lumber and other materials, along with higher freight and labor costs.

The higher costs were primarily offset by improved sales mix and increased productivity in our <unk>, Minnesota glass facility.

The glass segment, along with framing systems is where we see the most opportunity for long term margin improvement.

Most of the restructuring actions announced in August our focus on framing and glass segment.

We now expect to see profitability improvement from these actions starting in the fourth quarter.

Refocusing the business on differentiated high value add products should be also contributing to long term margin improvements.

We are renewing our focus on lean and continuous improvement to drive productivity gains.

In architectural services revenue grew 13% to $83 million as we continued to execute projects and backlog.

Operating income grew 10% to $9.0 million and operating margins came in at eight 7%.

The services segment continues to have strong project execution.

While margins were down slightly compared to the prior year.

This quarter was a nice improvement compared to the first quarter, we remain confident in services overall execution and outlook for the full year.

We are also encouraged by the improving order trends in architectural services net order flow has increased each of the last three quarters and as Tom mentioned backlog grew this quarter to $572 million.

Turning to large scale optical lso continue to recover from last year's Covid related shutdowns.

Revenue of $24 million grew 40% compared to last year's second quarter.

Demand has returned to normal and our sales mix included more premium products.

<unk> has also returned to a more normal level of profitability operating.

Operating income was $10.0 million with operating margin of 23, 3%.

And finally, our corporate cost increased this quarter to $8.0 million.

This was primarily driven by operating expenses related to transformation projects and increased healthcare costs that I mentioned earlier.

The corporate line is also included $5.0 million of restructuring costs.

We expect corporate expenses will remain above last year's level throughout the rest of the fiscal year.

Turning to page nine our cash flow and balance sheet remains strong.

Cash flow from operations in the quarter was $48 million.

This brings year to date cash flow to $55 million.

These are strong reserves and cash flow is about where it typically has been through the first half of the fiscal year.

Cash flow is lower than the last year, which was unusually strong.

As you remember last year, we benefited from reduced working capital and temporary cost actions related to Covid.

Year to date, Capex was $11.0 million below last year's level.

We expect capital spending ramp up in the second half of the fiscal year as we see more investment related to transformation initiatives.

Based on year to date spending we now expect full year capex of approximately $35 million.

Down from our previous estimate of $45 million.

We continue to return cash to shareholders year to date, we have returned over $32 million from share buyback and dividends that is more than double the level in last year's first half.

Balance sheet remains very strong.

Net debt is down to $102 million.

No significant debt maturities until June of 2024, and we had no borrowings and $235 million revolving credit facility.

This strong position provides significant flexibility as we start to execute on our new enterprise strategy.

Now turning to our outlook for the rest of fiscal 2021 'twenty, two which is on page 10 of our presentation.

As Tom mentioned.

We are reiterating our full year guidance based on an adjusted EPS basis.

In a range of.

Due to $2 four okay.

As a reminder, this guidance excludes the expected restructuring costs.

This quarter, we believe the headwinds we faced this quarter will persist.

Input cost inflation and supply chain challenges will likely remain significant issues, especially in framing and glass segment.

We expect continued topline softness and lower volumes in framing systems in glass.

Particularly in the short lead time parts of our business.

We also face the continued year over year headwind from the reversal of temporary cost actions that were in place last year.

We're taking near term actions to offset these headwinds and <unk>.

A continued focus on execution closely managing controllable costs, adjusting pricing to offset inflation and working to achieve benefits from our restructuring.

We expect these actions will offset much of the headwinds we are facing which gives us confidence in our full year outlook.

Our third quarter results will likely be similar to the second quarter.

We expect earnings will make a larger improvement as we move into the fourth quarter. When we expect to realize more of the benefit from our pricing and restructuring actions.

Also as a reminder, last year's third quarter included $11.0 million benefit and architectural glass related to new market tax credit.

This benefit will not repeat in this year's third quarter.

So while our outlook remains challenging in the near term we are confident that our team can continue to execute to substantially offset the headwinds as we close out the fiscal year.

This will put us in strong <unk> as we move into fiscal 2023.

With that I'll turn it back over to Tyler for concluding remarks.

Thanks Ashish.

As I said earlier I am very proud of our team's efforts. This quarter. There were a lot of moving pieces, but our team was able to drive progress and sustained positive momentum in our business.

We are particularly encouraged by our continued strong cash flow, which provides significant financial strength as we move forward.

We expect our operating environment will remain challenging, especially through the third quarter.

Our team is taking the right actions to offset these headwinds and we see a path to improved results in the fourth quarter and as we move into next fiscal year.

Most importantly, we are beginning to execute elements of our strategy to better position the company for the long term.

This remains an exciting time for apogee.

We knew this year with challenging and those challenges have increased given the broader economic environment.

We also realized that making a major shift in strategy and implementing it would take time with fiscal 'twenty three being the year, we would really start to see the larger impacts of this work.

But as we've highlighted today, we are making progress on several fronts and we expect that to accelerate as we close out this fiscal year.

We look forward to sharing more details with you at our upcoming Investor day, and with that we're ready to take your questions.

Thank you as a reminder to ask a question you will need to press star one on your telephone to withdraw your question. Please press the pound key.

Our first question comes from the line of Chris Moore with CJS Securities. Your line is open. Please go ahead.

Hey, good morning, guys. Thanks for taking a few questions.

Good morning.

Good morning, maybe just start with input inflation. So you talked about a $20 million headwind. It sounds like most of that is coming from framing and glass.

Wondering if you could provide a little bit more detail there on the split and really trying to understand where it's easier to raise pricing is easier within the framing segment in glass or maybe just talk to that a little bit.

<unk>.

Sure Mike Chris This is in the sheets up so glass inflation for the quarter $20 million as noted we have a lot of actions in place today on offsetting that is the procurement savings as well as pricing has offset about $10 million of the $20 million. So the net impact of inflation for the quarter is 10.

<unk>.

And on a year to date basis. This number is $14 million.

What do you think about the split of this I would say.

But 50.50 would be a fair split between the glass and framing segment on the inflation there are lots of moving pieces within the quarter, but on a directional basis I would say, it's a 50.50 split as you look at the lead times of our businesses. It takes some time for us to start recovering some of the price change.

As we do as we are committed to a certain number of projects. So we expect quarter three to remain.

Under a negative trend on inflation, but we start to see positive net inflation impacts coming through in quarter four.

And maybe Chris I'll, just add to that if you think about that split.

Framing with respect to pricing I mean, obviously, we're trying to offset costs ourselves customers never like to see price increases, even though a lot of them have become used to it at least the first several months of this year as it was going across not just our industry, but in the broader economy framing has some shorter cycle time, so they have been taking more.

Our pricing so they probably offset a larger chunk of that inflation. However, it's still been a net negative for them just given the speed of the price increases and glass, giving a little bit longer cycle time, and how projects are quoted.

There has been a bigger lag in their ability to see that pricing flow through on jobs and sales as we go forward.

Got you very helpful.

I guess longer term the expectation is that you can achieve $20 million to $30 million of annualized savings by the end of fiscal 'twenty three.

From a big picture perspective can you talk about the drivers.

What would be that that delta between 50.

Where are those savings going to come from that are less certain at this point.

Sure. So the focus on all of our restructuring program is on glass and framing segment right. So.

If you think about the structural improvements we are doing there is an SG&A piece to it but more importantly, the fees on our cost of goods sold that is going to improve in both glass and framing segments.

I'd say.

If you think about the split or areas, where we get a restructuring.

Drilling to people so as we shut down some of our facilities. We are we have let people go that would be one piece of restructuring benefits. The second would be facility shutdowns and related optimization of cost and SG&A.

Those are the two important pieces on optimizing our cost from restructuring that I can think of.

Think that hits, it well and obviously the simplification that we're doing in the business realignment that really impacts framing.

But also moving soda wall as we go into next fiscal year <unk> to our architectural services.

There are some high level savings from an SG&A perspective that will benefit from that consolidation in the in the larger framing.

Got it last one for me just maybe a question for your Investor day, but maybe expectations for glass operating margin range. Once restructuring is complete and non res market is a little bit stronger.

Yes, I would say at this point, we're not ready to give any long term guidance with respect to margins for apogee overall or any of the business segments.

We'll tell you that through this strategy work, we identified significant opportunities to improve our margins for glass and that's really the focus and emphasis for that business right now.

And probably well into fiscal 'twenty, three that we want to refocus and parts of the market, where we can differentiate ourselves more strongly delivering more value to the customers, which in turn shows up as more value for apogee and our shareholders with respect to margins. So that is the focus for glass, we do see some.

Significant upside on on margin improvement for them over the next year or so.

Got it I'll leave it there thanks guys.

Thanks, Chris.

Thank you and our next question comes from the line of Julio Romero with.

Sidoti <unk> Company. Your line is open. Please go ahead.

Hey, good morning, Todd and Ashish, Thanks for taking the questions.

Morning morning.

So I wanted to maybe talk about on the string a little bit more on the glass segment.

Maybe without speaking about margins, maybe more broadly if you could speak to the product focus going forward and glass maybe some examples of the premium high performance products, but I think you called out in your August press release.

Yes.

Yes, let me give you some high level and this is an area that we will go deeper into on the Investor day, but as we looked at our position in that market. We wanted to look at where we have opportunities to leverage some of the unique capabilities, we have on coatings as well as certain parts of the market certain types.

Projects that we saw an opportunity where we can differentiate ourselves.

Versus competition, especially some of the foreign competition.

Areas that the business is selling into now and it is part of their portfolio. What we're doing is putting a stronger emphasis on that as we go forward. We also see an opportunity to bring more value into what we take to market. Some of that would be organic product innovation that we would invest.

And ourselves some of that would be through third party partnerships, where we can leverage other technologies that are out in the market and combine it with our glass offerings to in essence raised the value of what we're selling and thereby also generate higher margins for that business.

Great I appreciate the color there and you spoke about adequate capacity in owatonna those support the additional activity can you maybe give us a sense of what utilization rates are looking like and what youll be running out post.

Restructuring and the glass segment.

So we don't really comment into that level of detail on campus capacity utilization. All I can say is that there is a lot of productivity work that's happening in owatonna right now and we are continuing to expand our capacity just based on that productivity work with all the kind of a couple of shutdowns that we had mentioned as part of our restructuring we still believe we have adequate.

Capacity for the next several years to take on the market growth that's coming out.

Okay Fair enough and then just last one for me and I'll pass it on.

On the services side I think you did see some sequential backlog improvement there can you speak to how you see backlog for services trending for the remainder of the fiscal year.

Well I think as we look out for the year. It was a positive sign that we saw this quarter. There is still unevenness that we expect to see in that.

Business, just as quoting activities moving around with the broader economic challenges.

So we've seen that improvement in orders in the backlog going up as a very positive thing.

Not ready to call victory that we will see that consistently as we move ahead, but we've got some very good positive signals with respect to that business moving forward.

Great. Thanks, very much and I'll pass it on.

Yes.

Thank you and our next question comes from the line of Matt <unk> with Craig Hallum. Your line is open. Please go ahead.

Morning, everyone.

Good morning, good morning.

So I'll just follow up on that last question a little bit.

No you said too early to call a little bit on services, but.

I mean as you look at the trends in that business, obviously services is the one.

That that Youre, youre doing well now, but youre going to start to feel the.

The impact of the downturn later than the other businesses.

As you get to fiscal 'twenty, three and clearly more optimistic about glass and framing I mean do you do you feel I mean, where does your confidence stand in terms of that services backlog, which is still very sizable.

Making up for.

Some of that softness so maybe.

Maybe youre able to keep that business flat in 'twenty three rather than.

Some compression there.

Yes, I appreciate the question.

We're not really ready to give guidance on fiscal 'twenty three.

But I will tell you is that <unk>.

Given that we're just midway through this fiscal year, it's too soon to call any way, how we would see that business performing I've commented on previous calls that team while they did see that that downside hitting them later has been actively working to fill that gap.

So that work continues and I think we have to give them time to continue to see that as we progress forward well have a little bit more insight as we get to the end of the calendar year and then certainly in our fourth quarter. We will start to have some better visibility to fiscal 'twenty three for that business.

Yes, no I can appreciate that.

But it does sound like you are pleased with health services has been executing and so just looking at it in that context here.

It sounds like you're optimistic COVID-19.

They will continue on the path <unk> been on.

Yes, we've been very pleased with how that business has been performing and also how they have been working to not only deliver this year from a margin perspective, after having a really great margin year last year.

But then as they build out fiscal 'twenty three.

And that strength is frankly, where we saw the opportunity to move soda wall under that business, because we see opportunities to leverage some of that strength within that business and raise its performance as well.

Yes got it.

Well, maybe last one for me just on velocity and the decision that you had talked about back in August.

Maybe just anything you learned in that business.

Clearly investment part of the market you now want to focus on but whether it's operationally or market facing what you learned in that business that maybe you can take to the rest of the glass segment.

Yes, we looked at that business through this the strategy work, we looked at current market as well as how we saw the future market playing out.

With respect to that into the market, we saw significant pressure on margins.

And so that we were not seeing the price points that was originally anticipated and therefore not seeing the margin that we expected for that business. So we took a forward looking view and didnt see that materially improving over the next few years that said as well what we were doing in that space, while it was taking.

A different approach from a technology and automation perspective, it really wasn't a strong differentiation from the end product itself and we saw it as being dilutive to our margins and our IC goals as we move forward and that led us to the difficult decision to exit that business.

We are working diligently with the team to effectively offset some of that investment through the sale of equipment as we shut down those operations and we're seeing some positive indications with respect to that as well.

Okay. Thank you.

Thank you.

Thank you and our next question comes from the line of Brent Thielman with D. A Davidson. Your line is open. Please go ahead.

Thank you good morning.

Good morning.

Tiredness windows that the move of the settle wall business into services become effective just from a reporting perspective.

Sure. So as you can see in the August 11th announcement, we are already working on transitioning some of the the parts of the business, but the real transfer of business can happen from first of March next fiscal year, we're looking at.

A lot of moving pieces within the sort of oil business.

Our services segment is trying to understand the key opportunities that can drive and this year will be focus on understanding the business and transitioning. It. So we are looking to let the restate a recast some of our numbers and segments coming from starting from first of March next year.

Okay, perfect and then on services I mean, you had good revenue growth, but the margins were a little lower talked about.

Some of the change in the mix is that is that your expectation for margins in the guidance through the rest of the year for the services business.

And a different mix versus last year.

Yes, I would say in services business is performing really well and there is always that element of project mix that comes along in those business so well.

Or quarters, we can see the margins going down quarter over quarter, but sequentially. They are continuing to.

Improve their margins.

Exceptionally strong margins in fiscal 'twenty one.

The second highest ever.

It'll be hard to repeat that in 'twenty, two but we still see strong opportunities in that business as the backlog is strong and the team is doing a very good job in their project selection and how the selective projects. So we continue to see good positive momentum and margin should be improving over time.

Okay.

The the transformation initiatives and some of the facility consolidation.

Come with that are there I.

I guess could there be significant real estate assets.

We could consider coming out of all of.

That might awesome contributed the balance sheet here.

What we have announced on August 11.

The key assets that we are looking at beyond that we do not see any significant opportunities on our assets for now of course, the strategies continue to evolve and we are understanding or different part of execution of that strategy and some of the decisions on assets may be made in due course of time, but for now whatever was announced on August 11th in terms of <unk>.

Segment assets those are the key assets that we are.

Reducing.

Okay.

And then saw the revised Capex guidance.

Fiscal year to date, you're running.

Well below that are there some projects earmarked stepped up that capex in the second half.

Just from the run rate, we've seen year to date.

Yes, yes. So if you think about the enterprise strategy work that so far we've understood where do we want to invest more and which are the areas, where we wanted to reduce their investments. So that's one of the key reasons, we are looking at investing.

Differently versus what we've heard.

<unk> in our plan for this year and secondly, the enterprise strategy work that we're doing we have invested some of it already.

<unk> systems and backbone work, that's happening that will continue to ramp up in the second half of the year.

So we'll manage that this as timing from a strategic perspective business she'd said, we actually we're having the teams slow walk some of those planned investments until we get a better sense from the strategy work in that deep prioritize some of the things that were in queue.

And we do expect a step up in the second half the caveat just as we are seeing with raw materials.

That's dependent on supply. So we know some of the some of the work that we want to execute we will have to rely on the ability to bring that equipment and et cetera. So that.

Is something that we're watching as we go through the second half, but our plan is to spend at that level now as we move ahead.

Okay, great. Thank you look forward to talking more tomorrow.

Thank you.

Thank you and our next question comes from the line of Jon Braatz with Kansas City Capital. Your line is open. Please go ahead.

Good morning, everyone.

Hi.

Index has been positive for the last six months and hopefully that bodes well.

Down the road.

But with the cost pressures.

That the industry has seen.

Aluminum glass and so on.

Do you see any evidence that some of these projects that maybe people architects are discussing and so on.

It might be might they be tabled for a while.

To see where these costco or are you seeing any any.

Anything such as that.

It will we're watching that really closely as you might imagine.

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It's too soon to tell if it's going to have a material impact on the nonresidential recovery.

I would say we've seen some projects pause that we're ready to come out for quotes and bids and at the same time, we saw other projects pull forward.

Or a push their schedules ahead with respect to that so it's been mixed signals at this point as far as what we're seeing obviously, what's happening with Covid return to workplace with the Delta variant any other variance that come out that could have an impact as well in and what people are deciding to do with projects. So.

We continue to watch that.

I would say, it's uneven, but we havent seen anything thats pointing to an acceleration of the recovery or at this point something thats pointing to a deceleration of the recovery okay. Okay.

You may have missed it.

When you are.

Announced the.

The restructuring a couple months ago, I think you said, 30% to $35 million in costs and now its 25, 20% to 25 or something like that.

What's the what's the delta there and what's the difference.

So yes, you got the numbers right. So we had announced a 30% sort of permanent as initial estimate and we are looking to spend about 20% to $85 million now there's a big change is the interest that was anticipated from potential buyers for some of the assets that we are selling.

We have seen a good interest and therefore, we see that we don't need to write down some of the assets and property plant and equipment.

Okay.

We will continuously monitor this and provide more details in quarter three by which time, we will have details on some of these transactions on selling these properties bundling.

Generally the other piece I would say is the teams have really executed well against this plan.

We put together a very detailed plan on how we would move this ahead coming onto the strategy work.

And the team is executing against that extremely well to the point that we're confident we will see some of those benefits actually flow into our fourth quarter.

Which is a very good thing and for US. This was an area where we looked at.

Future going forward, if we want to get back into M&A. We're approaching some of this is integration work with across the business units as mergers are ethical and while small window and wall business combining is thats our instruction to the teams and we're building out a playbook and how they are managing that so they can start to exercise that.

Muscle because we do intend to be an active portfolio manager.

Which means at some point in the future we will be back in the market and this is a chance for our teams to start to exercise some of that work. Okay. Alright. Thank you very much.

Thank you. Thank you.

Thank you and I'm showing no further questions at this time I would like to turn the conference back over to Ty Silverhorn for any further remarks.

Well, thank you Michelle and thanks, everyone for joining us today and learning how we are driving progress even in a very challenging environment.

As I said earlier, we've navigated through a difficult second quarter offsetting some of the significant cost headwinds, we faced and we're taking near term actions to protect margins, but we see significant opportunity for long term margin and ROIC gains.

Finally, we made progress on our strategy work and have begun that execution.

We look forward to seeing you virtually or in person at our upcoming Investor day, where we'll share more on our long term outlook and strategy with that thank you have a great rest of your day and a great week.

This concludes today's conference call. Thank you for participating you may now disconnect.

[music].

Good day and thank you for standing by welcome to the second quarter 2022, Apogee Enterprises, Inc. Earnings Conference call. At this time all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question. During the session you will need a question on your telephone please be advised that.

Today's conference maybe recorded if you require any further assistance. Please press Star then zero I would now like to hand, the conference over to your host today, Jeff have Shen please.

Thank you Michelle good morning, and welcome to Apogee Enterprises fiscal 2022 second quarter earnings call.

With me today are tied silver Horn, Apogees, Chief Executive Officer, and Ashish Gupta, Chief Financial Officer.

I'd like to remind everyone that there are slides to accompany today's remarks. These are available on the Investor Relations section of Apogees website.

During this call we will reference certain non-GAAP financial measures.

Definitions of these measures and a reconciliation to the nearest GAAP measures are provided in the earnings release, we issued this morning.

I'd like to remind everyone that our call will contain certain forward looking statements.

These reflect management's expectations based on currently available information.

Actual results may differ materially.

More information about factors that could affect apogees business and financial results can be found in our SEC filings and with that I'll turn the call over to Todd.

Thanks, Jeff and thank you everyone for joining us today.

This morning, I'll discuss our second quarter results and the trends, we're seeing in our business.

Share some insights about the rest of the fiscal year and provide an update on our strategy work.

Then as she will give more details on the quarter and our outlook after that we will take your questions.

So let's start with the quarter results highlighted on page four of our slide deck.

I am very proud of our team's efforts this quarter.

We are managing a lot of moving pieces, but our team has executed well and we maintained positive momentum in our business even in a very difficult operating environment.

Adjusted margins and earnings improved sequentially compared to the first quarter.

This was led by large scale optical and architectural services.

Lso continued its strong recovery bouncing back from the Covid related disruptions that impacted it last year.

In architectural services delivered double digit growth in both revenue and operating income.

Architectural services also increased its backlog this quarter, an encouraging sign as this is the first backlog growth in that segment in the past year.

Cash flow continues to be very strong.

We had $48 million of cash from operations in the quarter, improving our already healthy financial position and we return cash to shareholders.

We did faced several headwinds that impacted our results this quarter.

As with many companies cost inflation is a significant issue.

Input costs are increasing faster than we can mitigate their impact given the speed of raw material price increases and the cycle time of some of our businesses.

For example, the price of aluminum, which as Apogees largest material cost category has increased 65% in the past year.

In fact aluminum prices are up nearly 20% just since our last earnings call.

We are also seeing meaningful cost increases for glass coatings freight and other direct and indirect materials used in Ah patients.

We do work to mitigate some of these do hedging in contracts, but the breadth and depth of the increases have outstripped much of that.

Additionally, we are experiencing some challenges in our supply chain.

The market for many materials is very tight with lead times are pushing out and some suppliers are reluctant to take on new business as we seek additional sources.

I would like to acknowledge the efforts of our procurement team and helping the company navigate through this situation.

Over the past two years, we've added new talent to build a stronger procurement organization aligned to our business segment priorities.

This team is offsetting some of the inflation impact from sourcing alternatives.

Flyer negotiations and driving cost savings and other categories.

Even with these efforts, we were not able to fully offset increased costs of materials and freight.

We are achieving meaningful progress in procurement as well as driving cost out in our operations, but this is not clearly visible in our results as inflation has outstrip these efforts at a faster rate.

In addition to our procurement and cost efforts, we are taking price actions to mitigate the impact of both labor and material cost inflation.

As a reminder, many of our projects have long lead times. So there is a lag from when we take pricing actions until that impact shows up in our financial results.

The impact of cost inflation is hitting us now while the full benefits from pricing will not start to show up until the fourth quarter and into next fiscal year.

I'd also like to comment on our end markets.

We thought this was going to be a tough year for volumes, especially in framing systems and architectural glass and that is how things are playing out.

Nonresidential construction remains in a downturn.

The most recent data from the census Bureau shows that nonresidential and residential construction spending continues to trend lower.

Total non residential spending is down 11% from the pre pandemic high.

There are reasons to be optimistic about the longer term outlook in our markets.

Forward indicators like the Abi and construction starts have been positive for the past several months.

These forward metrics are indicators of the direction of our business 12 months to 18 months out into the future.

So it is likely a few more quarters before we begin to see these improvements show up in our business results.

Looking ahead to the rest of the year, we do not expect the challenges we faced this quarter to dissipate.

We will continue to take actions to protect our margins in the near term.

This includes a continued focus on execution.

Closely managing our controllable costs.

Price actions as appropriate.

And working to realize the benefits from our restructuring actions as soon as possible pulling more of these savings into our fourth quarter than originally planned.