Q2 2020 Earnings 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.
Ask the question during the session you will need to press star one on your telephone if you require further citizens press Star Zero I would now like to turn the conference over to your Speaker today, Jeff had said if Chen. Thank you. Please go ahead Sir.
Thank you good morning, and welcome to Apogee enterprises fiscal 2022nd quarter earnings call with me today are Joe pushes apogee, 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 website.
During this call we will reference certain non-GAAP financial measures definitions of these non-GAAP measures and a reconciliation to the nearest GAAP measure is provided in the earnings release, we issued this morning, which is also available on our website.
I'd like to remind everyone that our call will contain forward looking statements, reflecting managements expectations, which are 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 FCC filing.
And with that I'll turn the call over to you John .
Alright, 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're seeing across our businesses.
Talk about the progress we're making on several key initiatives to advance our long term strategy.
And then I will 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 ethical projects that we acquired.
We're on track with our schedule and cost estimates.
We expect the building will be largely in closed 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 will discuss shortly.
In particular, the coal business is starting to demonstrate its long term potential performing nicely in the quarter and year to date.
The ESCO team has made significant progress increasing productivity.
Quality controlling its cost 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 than tripled operating income compared to last years second quarter.
While the segment certainly had a modest comparison, we're pleased with the substantial year over year improvement.
This year over year margin gain would have been even better if not for the startup costs related to our architectural glass growth initiative, which reduced segment margins by about 100 basis points in this quarter.
We're excited about this opportunity now provide more details about this investment in a few moments.
Our glass segment has also seen some negative impact from the stronger us dollar.
This is something that is affecting most us manufacturing companies over the past year. The dollar has steadily strengthened versus other currencies.
This disadvantages are us based glass operations increases competitive intensity, particularly from European competitors.
For this reason, we're reducing our full year outlook for architectural glass and we'll continue to monitor changes in the competitive environment.
In architectural services, while we anticipated that revenues would be lower this quarter due solely to timing of projects in the backlog. The segment performed better than we expected driven by strong project execution at the construction site.
Based on year to date results were increasing our full year outlook for architectural services.
In addition, the services segment was awarded several new projects during the quarter pushing its backlog to over $500 million.
This record backlog further increases our confidence in the longer term outlook for this segment and gives US good line of sight to revenues over the next two fiscal years.
Finally in large scale optical we continued to deliver strong operational performance improving on its impressive operating margins in particular, our team has had great success.
In improving our mix to higher value added products, which has benefited both revenues and margins.
So overall, a solid quarter and we feel very confident about how we're positioned for the remainder of the year.
I will now provide my view of the end markets.
Looking at the conditions in the economy and our end markets. All of you see the same headlines IC. So it's hard to argue that there is not some uncertainty in the economy.
In spite of the headlines we still see reasonably healthy bidding activity. It continues to feel like were bumping along the top an environment in which apogee can continue to grow.
Based on U.S. government data, while this economic expansion is the longest since World War two.
It is also been the weakest of the 11 recoveries and overall building in the Nonresi sector has remained below prior recoveries.
The office sector, which is most important to us remains strong as does healthcare and education also key to our portfolio office vacancy rate rates are at decade, plus low levels as is rental rates as they come down.
Our as they are rising I apologize and consumer spending and job growth remain reasonably strong.
Bottom line is that the Nonresi market appears to remain balanced as the US kind of me continues to migrate from manufacturing to services that mix works in our favor.
Looking back at our company the project wins, we've had an architectural services as well as our pipeline reinforce our confidence and validate that aspects of the commercial construction market are not in decline and I expect we could see further backlog growth in services in the third quarter.
As I mentioned earlier, our biggest economic concern right now is the impact of the stronger us dollar, which we continue to monitor.
Looking at our strategy and initiatives to drive growth and margin expansion, regardless of what's going on in the economy and our end markets. We are focused on managing what we can control to better position the company for long term earnings.
Earnings growth and more consistent performance throughout the economic cycle, we've had a lot of success executing our strategy over the past eight years in apogee is clearly a stronger company than it was in fiscal 2012, we diversified our product and project mix, both within each of our segments and across the company. We've expanded the growth opportunities available to the company through new product innovation and geographic expansion and we've improved the efficiency and productivity of our operations I'm confident this strategy is still the right direction for apogee over the past several quarters. We've had some near term challenges most most of which are behind us but throughout this time, we have not been sitting still we've been moving forward with a number of initiatives to advance our strategy. Let me provide some detail on these first we continue to believe our framing systems segment.
As the largest opportunities for long term growth and margin expansion as well as stability.
Throughout an economic cycle.
We've had success and we are accelerating our efforts toward that end, we recently created and appointed a new leadership team for that for the first time, we will have combined PML responsibility for our entire framing systems segment, which was previously operating as as six independent businesses. This new leadership team under the command of a proven PNM leader that I brought into the company a year and a half ago is focused on accelerating our progress by increasing integration and driving synergies across all of our framing systems businesses.
For example, during the quarter, we took initial steps to increase supply chain integration and optimize our facility footprint by closing a manufacturing facility in shifting production to other apogee locations.
Additionally, in framing systems, we completed a significant facility investment at our main ESCO operations Center. This quarter designed to streamline the processes for handling and shipping finished goods to enable further shop floor efficiency improvements. This investment is already having a positive impact on escos productivity quality and margins.
The past two quarters, we mentioned a growth initiative in our architectural glass segment that we would like to provide some additional details on today.
We've invested in a new facility located in Texas.
Which we will expect to be operational in our fiscal third quarter. This facility will be focused on the short lead times segment.
The architectural glass market.
While our Viacom glass businesses, the established leader in mid and large sized projects.
This facility marks our entrance into a portion of the market in which apogee has not historically participated.
As short lead times smaller projects comprised the largest sub segment of the overall architectural glass market. We believe this expansion offer significant long term growth potential in all phases of the economic cycle.
This new facility will also supply some of the glass needs of our framing systems segment generating further synergies across our portfolio.
We're excited about this opportunity, which expands our addressable market and continues our efforts to diversify away from the most cyclical large project segment of the Nonresi construction market.
Lastly, Weve launched an initiative to look at opportunities for material procurement savings across all of apogee.
Historically, our purchasing has been mostly decentralized across our nine individual operating units.
We are analyzing all categories of spend for opportunities to leverage our scale and drive synergies.
In our supply chain, we've engaged a leading advisory firm to add expertise and help accelerate these efforts. We are still in the early stages of this initiative, but believe the opportunity will have meaningful impact on our profitability in fiscal 21 and beyond we'll have more to say about this in the future quarters.
We have an exciting set of opportunities ahead of us most of which are largely in our own control, which gives us confidence in our plan to deliver continued earnings growth over the next several years.
With that I'll pass it over to Jim will provide more details on the quarter and our outlook.
Before we take questions I'll return with a few additional comments Jim.
Thanks, Joe Good morning, everyone.
I'll begin with our consolidated results, which you can see on page five 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%.
It was down from adjusted margin of 8.1% in last years 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 years 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 all together earnings per share were 72 cents.
I'll now turn to segment results on slide six.
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 years second quarter.
The lower margin was due.
Approval of project mix as well as costs associated with initial steps of implementing the supply chain synergy projects that Joe mentioned.
These cost had about 100 basis point margin headwind in the quarter for gaming systems.
Architectural glass had a strong year over year improvements 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 startup costs related to the new facility for the growth initiatives, serving the short lead time segment.
Year to date, we've incurred $1.6 million of our estimated $4 million to $5 million of startup expenses for this initiative.
As expected architectural services revenue decreased to $62 million from $76 million in last year's second quarter due to the timing of projects.
Operating income was $4 million with operating margin of 6.5% down from 10% in last year's second quarter due to reduced operating leverage on the lower revenue base.
Architectural services continued to have great success in its markets with several new project wins during the quarter, which increased the segment's backlog to a record $502 million.
Our large scale optical segment grew its revenue by 2% to $21 million.
Segment operating margin increased to 22.3% compared to 20.8% in last years second quarter.
Both revenue and margin benefited from a more favorable sales mix in the quarter.
Turning to slide seven I'll briefly touch on cash flow and the balance sheet.
We had a solid quarter of cash flow rebounding from a slow start to the year in the first quarter.
Fiscal year to date, we have now generated $18 million of cash from operations.
We're still below last year's level, primarily due to increased working capital related to completing the legacy Echo project, which has reduced year to date cash flow by $21 million.
We expect this working capital impact will be much less in the second half of the fiscal year.
Year to date capital expenditures were $23 million and we continue to expect full year capex in the range of $60 million to $65 million.
During the quarter, we used our positive cash flow to pay down $20 million of debt, reducing our total debt to $273 million down from $293 million at the end of the first quarter.
As we move through the rest of the fiscal year, we will look to deploy excess free cash flow to further reduce debt.
And we'll also continue to evaluate opportunistic share buybacks.
Turning to page eight for the outlook, we are maintaining our guidance for the full year.
We are adding some costs into the fiscal year for the supply chain productivity and purchasing synergy projects that we mentioned that were not previously factored into our outlook.
We believe these are high return investments that will increase our future profitability.
However, most of the positive impact will not be seen until next year.
That said, we are working to offset these investments in the back half of this fiscal year.
With these additional costs are a factor that could push us towards the low end of our guidance range.
The upper end of our guidance range assumes more favorable project schedules, which drive higher revenues in the year increased order volume in a shorter lead time segments of our business and accelerated progress on various margin improvement initiatives.
We've made a few adjustments to our segment guidance, which is on page nine.
Our full year guidance for framing systems is unchanged.
As of our last earnings call. We did expect Q3 to be the strongest quarter for framing systems. However, due to customer projects schedules. There was some framing system revenue pull forward into the second quarter and some is pushed out into the fourth quarter.
We also are expecting an additional roughly 100 basis points of margin headwind for framing systems in the third quarter from additional costs associated with the implementation of the supply chain projects.
With offsetting benefits more weighted to starting the fourth quarter and next fiscal year as these projects kick in.
So at this point, we expect framing revenue and margins will be sequentially lower in Q3 with a rebound in the fourth quarter.
Just as a reminder, timing shifts of customer construction project schedules is not unusual for this segment and we remain focused on effectively servicing our customers.
In architectural glass, we now expect full year revenue growth in the upper single digits down a bit from our previous estimate of approximately 10% growth.
This is primarily due to the increased competitive pressure related to the currency exchange rates that Joe discussed.
We are also slightly reducing our full year margin outlook for architectural glass to a range of 6% to 7% compared to our previous forecast of approximately 7%.
We continue to expect approximately $4 million to $5 million of total startup costs for the new architectural glass growth in niche initiative, which will reduce full year glass margins by 100 to 150 basis points.
These startup costs will have the greatest impact in the third quarter as we begin operations.
We should begin to generate limited revenue in the fourth quarter and we expect this initiative will continue to ramp up in fiscal 21, making positive contributions to both revenue and operating income.
Our architect our outlook for architectural services has improved compared to our previous guidance based on solid year to date results and some new project wins that will begin to flow this fiscal year, especially in the fourth quarter.
We now expect full year served architectural services revenue will decline by approximately 10%, which is compared to our previous guidance of a decline of approximately 15%.
And we now see full year margins of approximately 7%.
At the high end of our previous range of 6% to 7%.
The project wins and backlog bode well for the services segment as we look ahead to fiscal 2021 in fiscal 2022.
Finally, our full year outlook for large scale optical is unchanged as we continue to expect mid single digit growth and operating margins of approximately 25%.
So we have some puts and takes but net net we feel good about our full year guidance with that I'll turn the call back over to Joe.
Thanks, Jim to wrap up we're pleased with the progress we've made through the first half of the fiscal year, we are delivering on our commitments and we see a lot of positive momentum across our businesses and we are 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 the next fiscal year. These initiatives are underway.
And some are already having a positive impact.
I can you continue to believe the future is bright for apogee, we have a terrific team a business strategy has strengthened our company.
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.
As a reminder to ask a question. Please press star one on your telephone to withdraw your question press the pound key please stand by while we compile the county roster.
And our first question comes from Chris Moore of CJS Securities. Your line is now open.
Hey, good morning, guys.
Hey, Chris Good morning.
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 for for this year.
Yes.
So I mean, the two primary factors are really going to be the.
Kind of timing of the work that we have in front of us our pursuing and the ability to fill in and 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 were able to see some of those benefits come into this fiscal year.
Thats a driver that could push us to the higher end.
The lower end assumes that.
We have more of the cost and we don't have the revenue upsides.
Got you thanks.
And then on the.
The new glass initiative.
Maybe just talk about kind of who is the competition. There are there any unique challenges from a labor standpoint or otherwise associated with this.
Yes.
Chris I am and I again I.
Been a little bit quiet on this for strategic reasons for competitive reasons and I'll continue to limit my comments.
We are actually launching this quarter that we're in right now Q3.
So deli being more for me to say as we go forward, but this is a.
Allow us to compete in the regional market were very short lead times are required we have a very automated facility.
The people, which is far more limited them, we're used to in our other factories is.
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 in the factory workers in place.
And we will be able to compete in this very quick.
No 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.
Two global competition on the large monster towers that are not only.
Holly highly volatile from a.
From a end market and revenue stream, but also such long lead times that international players can compete for that which is not possible. In this rapid short lead time business, which is over half. The market is 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. Thank you, Chris we strategically fit, Texas, which is a very big and robust construction market and this 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 will 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.
Hey, good morning, there Werent, maybe and.
I I understand you may not share a whole lot of details here, but I know you pick 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 four to 5 million. I mean is that a rough is that roughly a good way to think about what it would mean per location. If you were to expand beyond Texas.
Yes, it will.
Eric I am not going to comment on our strategy going forward.
Obviously as I mentioned, it's a regional play I think these initial PML startup costs are indicative of what it what it requires.
Capital layout.
Is much more modest than a large glass operation.
And.
Depends on whether you are building, a new building or are or renting a facility that exist.
They are certainly.
Within our capital.
Wheelhouse, if we choose to do further regional expansion.
Chris.
Full facility I think we've talked about this before I mean total capital cost is roughly $20 million.
And the startup costs, we've called out I think.
There is 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 this market's a little bit different.
Then 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 glassware 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 dollar order input from.
Retrofit renovation this year and I'm very pleased with that and this this business will contribute to that it's not 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 go 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 demanding glass that that was kind of a work in progress I mean, another another solid quarter as assumption that you would still characterize it in that way or do you think it's kind of something that youve put behind you.
Yes, weve pretty much put the hiring issues behind us and glass when I referenced some operational challenges in the past several quarters I was clearly referring to.
The projects, we acquired an acquisition of the ethical business, which I've commented on this call and last summer the.
The issue, we had with 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 were at levels.
It's it's one of the more challenges all of us manufacturers and us have is finding.
Talent, but it's not something we're calling out as an operational concern for us and the big one was last in that is behind us.
Okay. Thanks.
Thanks.
Thank you and our next question comes from Julio Romero with Sidoti and company. Your line is now open.
Hey, good morning, everyone.
Julio.
So wanted to ask about the strategic growth initiative in glass.
Historically, when you've talked about that shorter lead time in market.
You've talked about.
Education healthcare as more of that type of work and less office type of projects is that the way. The same way, we should think about any any future work that you'd be targeting in Texas.
Okay.
It's really I mean.
It really covers all segments.
It when it covers is really kind of smaller office. If you think more like that three or four kind of story type office building, but it really is geared to service all segments of the marketplace.
Equally if storefront.
Wes then think of buildings that are generally less than five stories.
Again, thats 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 I mean.
Many of the general contractors and Lazing contractors that are glass people sell too. It's the same but they've never been able to go to our existing facility for these kinds of lead times.
Our operations are not set up for that with the kind of glass in the coatings, we have traditionally delivered.
Got it Thats helpful and then on the supply chain synergy projects in framing.
Yes 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, really hasn't really what we're what we're doing is.
When we look at it. This particular initiative is looking at kind of our execution, 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 will.
Thank you and again, ladies and gentlemen, if you would like to ask a question at this time. Please press Star then one on your Touchtone telephone.
And our next question comes from Jon Braatz of Kansas City Capital. Your line is now open.
Good morning, everyone.
Joe just wanted just want to touch on the.
The strong dollar and its impact on your business are.
You cut your your guidance back a little bit as 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 can you talk a little bit about the impact of the stronger dollar is having on you know on maybe the bidding and the activity levels that you're seeing.
Sure Yeah.
John were still up our glass segment is still the market leader and.
Mark and share demand in the large projects greater than 20 stories more meaning commercial towers and a five to 10 to 15 storey buildings, which we call the mid market. Both both those markets make up a little less than half the end market. They are about equal in our business that is the largest demand shira demand player in that space, but we used to 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 in it right now at about $1.10 per euro.
When I when I arrived here we were.
Even in the midst of a just coming out of the great recession, we were exporting about $40 million of glass.
You know that the dollar and the euro was about $1.30 to the euro at that time.
I believe that to be more parity based on.
The economies in Europe , and the us it at the times.
You know, we're not counting on it going back there.
As it started to go back from a dollar five 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 got below $1.10, a week or so ago, it's back at a $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 a 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 us 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 are quality delivery and how we stand behind our product.
But first and foremost we'll remain disciplined and project selection that is at the forefront of why our services segment has been doing so well is there a disciplined approach to what projects. They will go after.
And 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.
The ethical business and you talked about 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 am confident I wouldn't say more or less I'm very confident we will or I wouldn't say it.
Right.
I expect we will see some recovery in the second half of the year, obviously, they'll be nonrecurring 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 its.
Kind of the corporate team sure 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.
Justin saying I believe we will see recovery and we will see some this year, but but these things take time and.
We'll report it as soon as we have news to report okay. They are not as but I want to be clear John they're not in our.
I understand okay. Thank you.
Thanks, John .
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 pushes for closing remarks.
Yes, Thank you Sonja team.
I feel confident we did what we said we would do we 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 your thank you for participating you may now disconnect.
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