Mary Ann Jackson Joseph F. Puishys - Chief Executive Officer, President, Director and Member of Strategy & Enterprise Risk Committee James S. Porter - Chief Financial Officer and Principal Accounting Officer

Robert J. Kelly - Sidoti & Company, LLC Colin W. Rusch - Northland Capital Markets, Research Division Jonathan P. Braatz - Kansas City Capital Associates

Good day, ladies and gentlemen, and welcome to the Fiscal 2014 Apogee Enterprises Inc. Earnings Conference Call. My name is Brea, and I will be your operator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Ms. Mary Ann Jackson. Please proceed.

Thanks, Brea. Good morning, and welcome to the Apogee Enterprises Fiscal 2014 Second Quarter Conference Call on Thursday, September 19, 2013. With us on the line today are Joe Puishys, CEO; and Jim Porter, CFO. Their remarks will focus on our fiscal 2014 second quarter and our outlook for fiscal 2014. During the course of this conference call, we will make forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are based on current expectations and the current economic environment and are, of course, subject to risks and uncertainties, which are beyond the control of management. These statements are not guarantees of future performance, and actual results may differ materially. Important risks and other important factors that could cause actual results to differ materially from those in the forward-looking statements and projections are described in the company's annual report on Form 10-K for the fiscal year ended March 2, 2013, and in our press release issued yesterday afternoon and filed on Form 8-K. Joe will now give you a brief overview of the results, and then Jim will cover the financials. After they conclude, Joe and Jim will answer questions. Joe? Joseph F. Puishys: Thank you, Mary Ann, and good morning, everyone. Welcome to Apogee's second quarter conference call. We've recorded another solid quarter with results. In spite of modest revenue growth, we saw a nice increase in operating income and earnings per share. In addition, we grew our cash and short-term investments and did it in a quarter where we made an acquisition. Our second quarter operating income grew 24%, to $9.4 million, and we earned $0.21 a share. Four of our 6 businesses grew nicely in the quarter on top line. This growth, though, was offset by declines in our Architectural Services segment and our Architectural Framing Systems window business. This was due to project timing, which we had anticipated. A couple of comments on these 2 businesses. First, we expect that the services and window business, both have a stronger second half and will contribute to backlog growth in the third quarter. In fact, our services segment expects to move several million dollars of committed projects into backlog in the upcoming weeks, and I expect our highest level of orders in that business since the recession 5 years ago. I am pleased with our year-to-date revenue growth of 8%, which exceeds our growth in our end markets, which are improving slowly. We had strong operating income of 24%, as I mentioned, in the quarter. Our operating margin increased 100 basis points to 5.2%, while our gross margins grew 110 basis points to 21.6% in the quarter. Our conversion rate to income on incremental revenue was more than 75% this quarter. The margin improvement results from better mix, pricing, productivity and operating leverage. The biggest contributor to our strong operating income growth was our Architectural Glass segment, which saw a nearly $3 million improvement, as it moved from a loss in the prior period to operating income of $800,000. Our Large-Scale Optical segment again turned in solid performance, with operating margin of almost 27%. Our Architectural Services business reduced its operating losses from over $1 million last year to $800,000 this quarter on -- at a time where we had a 10% revenue drop, reflecting the improved margin on projects going into backlog and now being revenue that Jim and I talk about frequently. This improvement reflects those higher margins we're seeing in the business, which we have been highlighting. Our operating income for the Architectural Framing Systems segment declined as improved earnings for 2 of our businesses, storefront and finishing, were offset by the aforementioned window business results, where there was an anticipated gap in the schedule of more complex projects. Despite the expected decline in operating income, this segment turned in a healthy operating margin of 10.5% for the quarter, and our backlog in the aforementioned window business has grown this year by 27%. In the second quarter, we completed an acquisition in this segment, which adds to our historic window renovation product line and extends our presence in the Western United States, in line with our strategies to grow through new products and new geographies. Results from the acquisition completed late in the quarter were immaterial. Even after this acquisition, our cash and short-term investments grew 8% from the prior year period to almost $74 million. Our consolidated backlog grew to $304 million, up from $302 million in the first quarter and $298 million at the beginning of the year -- fiscal year, that is. With the volume of projects awaiting final contracts before moving into backlog, we expect to see a nice backlog growth in the third quarter. And we are continuing to see improved margins in our backlog, as evidenced by our operating margin improvement in our services business this quarter. Looking at the outlook for fiscal '14, we continue to expect strong top and bottom line improvement for the fiscal year as we implement growth and productivity initiatives. We have raised the bottom end of our earnings per share range and now expect to earn between $0.93 and $1 per share for the year, up from our prior guidance of $0.90 to $1. And this is based on our big visibility into our backlog, the project pipeline and our current operating performance. We are maintaining our outlook for revenue growth in the high-single digits. I am pleased that we are experiencing very strong bidding activity for future architectural work, and our pipeline for new project awards is positive, and we anticipate strong backlog growth in the quarter, as I mentioned. In addition, margins on new orders continue to be at better than prior year margins, giving us visibility to improved earnings. With our expectation of high-single-digit top line growth, we again anticipate outperforming domestic commercial construction markets by several percentage points. We continue to expect capital spending for fiscal '14 to be in the range of $40 million to $45 million as we invest in growth, productivity and new product development. Our anticipated 2014 performance and investments are the first steps in achieving our 3-year target of revenues of $1 billion and 10% operating margin. I believe that our focus on operational improvements, as well as our strategies to grow through new geographies, new products and new markets will allow Apogee to continue to deliver the improved results that will allow us to reach these goals by the end of fiscal 2016. Jim will now cover the financials in more detail. Jim? James S. Porter: Thanks, Joe. Our second quarter performance was solid, with operating income of $9.4 million, up 24% over last year and earnings per share of $0.21, up 17%. Revenues of $178.3 million were up 1%. I'll briefly go over the results for our 4 reporting segments. In the second quarter, Architectural Glass segment revenues grew 11% to $70 million as the segment moved to operating income of $800,000, up from a loss of $2 million in the prior year period. Top and bottom line increases resulted from improved mix and pricing as we see an increase in higher value-added projects, as well as ongoing productivity improvements and higher domestic volumes. The Architectural Services segment had a 10% decline in revenues to $42.2 million due to the timing of project flow. This projects-based subcontracting business is somewhat more impacted by normal timing variation experienced on construction projects, impacting quarter-to-quarter timing of revenues. On a year-to-date basis, we've had growth of 4% in this segment, with 19% revenue growth in Q1, offset by a 10% decline in the second quarter. The second quarter operating loss of $800,000 improved 23% despite the decline in current order revenues, reflecting the improving project margins flowing through. We believe we have now mostly worked through the trough period project margins in this segment. Architectural Framing Systems revenues of $49.5 million were down 5% compared to last year, while operating income of $5.2 million was down 15%. We had nice top and bottom line growth in the segment's storefront and finishing businesses that was more than offset by the window business results, where revenues and operating income declined. The longer lead time window business had a gap in its schedule coming into the year. We are seeing good success in winning new work and growing window business backlog, but long lead time projects will largely fall into the next fiscal year. Our second quarter average capacity utilization across all architectural manufacturing businesses was roughly 65% compared to approximately 57% in the first quarter and approximately 63% in the fiscal 2013 second quarter. Our Large-Scale Optical segment revenues were up 1% to $19.7 million, and operating income was up 2% to $5.3 million. The Picture Framing business performed well, achieving an operating margin of 26.9% compared to 26.5% in the prior year period on good operational performance. The consolidated second quarter backlog was $304.2 million, up from $301.8 million in the fiscal 2014 first quarter and $301.3 million in the prior year period. I want to again remind you that our business can have lumpy order intake activity, so we don't require or necessarily expect sequential backlog growth each quarter to be consistent with a longer-term trend. Our backlog mix at the end of the second quarter remained largely unchanged. The institutional sector remained at 45% to 50% of the backlog, with health-care and education projects the significant majority. Office sector held at just over 35% of the backlog. Hotel, entertainment and transportation was 10% to 15% of the backlog, and multi-family residential, including high-end condos and apartments, continues to be less than 5% of backlog. Regarding the timing of the backlog, approximately $202 million, or 66% of our backlog, is expected to be delivered in fiscal 2014, and approximately $102 million, or 34%, in fiscal 2015. Apogee's tax rate for the second quarter was 34% compared to a 35% rate last year. Our debt was $20.8 million at the end of the second quarter compared to $30.8 million at the end of fiscal 2013. It remains unchanged from last quarter, when we redeemed approximately $10 million of outstanding recovery zone bonds. Virtually all our current debt is long-term, low-interest industrial revenue bonds. Cash and short-term investments totaled $73.7 million, up from $69.7 million in the first quarter after acquiring the assets of a window business in Colorado, as Joe discussed. This business, which will be reported in our Architectural Framing Systems segment as part of our window business, is expected to contribute about $10 million in annual revenues, as it enhances our window product offerings and also expands our Western U.S. footprint to drive additional growth. Year-to-date capital expenditures were $8.2 million compared to $15.7 million in the prior year period, as many of our planned investments for growth, productivity improvements and new products will fall into the second half of the current fiscal year. We had positive free cash flow of $8 million in the second quarter. Noncash working capital was $70.3 million, up from $57.4 million in the prior year period and $54.1 million at the end of fiscal 2013, as we grow the business and extend our footprint in a couple of business units. Our days working capital continued to grow solid balance sheet management at 48 days, up slightly compared to 41 days in the prior year period. We define free cash flow as net cash flow provided by operating activities minus capital expenditures. Noncash working capital is defined as current assets, excluding cash and short-term available-for-sale securities, short-term restricted investments and current portion of long-term debt, less current liabilities. While days working capital is computed looking at our controllable working capital assets and liabilities, accounts receivable, inventory and accounts payable. In terms of our outlook, for full year fiscal 2014, we have narrowed our earnings per share range, raising the bottom of the range to $0.93 from $0.90 and holding the top at $1, as we obtain visibility into our backlog and pipeline. At the same time, we've maintained our outlook for high-single-digit top line growth despite limited help from domestic commercial construction markets. We have a nice backlog level and are seeing very good bidding activity. In our longer lead time projects-driven businesses, though, the majority of work that will be coming in as bookings is going to generate revenues for fiscal 2015 and beyond. The external metrics we watch, including job growth, the Architectural Billings Index, the McGraw-Hill Construction forecast and consumer confidence continue to point to improving markets for Apogee, consistent with what we see with our bidding activity. Our second half is then expected to be stronger than the first half. We should see nice top line sequential growth from the second quarter, with the third quarter anticipated to show a bit stronger margin mix than Q4. We expect full year gross margins of approximately 22%, and we anticipate a tax rate of approximately 33% for the full year. We expect to generate positive free cash flow for fiscal 2014 after spending $40 million to $45 million for the full year on capital that is balanced across investments for growth, productivity and new products, as well as for maintenance. In addition, we'll look for acquisition opportunities that fit our strategic goals. Depreciation and amortization for the year should be approximately $27 million. I feel good about our first half performance, with 8% top line and 46% earnings per share growth, and look forward to continued year-on-year growth in the balance of fiscal 2014. We're making nice progress on our strategic initiatives, with geographic expansion, development acquisition and introduction to new products and driving productivity improvement. We see significant future opportunities that'll leverage Apogee's strong financial position, leading brands, products and services and operational and strategic initiatives. Joe? Joseph F. Puishys: Thank you, Jim. Okay, Brea, would you please open the call for questions?

[Operator Instructions] Your first question comes from the line of Robert Kelly with Sidoti. Robert J. Kelly - Sidoti & Company, LLC: Just, Jim -- I think Jim made the comment that the low-margin work bid near the cycle trough was completely clear from the installation business, is that correct? James S. Porter: Mostly clear. I'd say we probably have -- in the neighborhood of 10% of our backlog or a little bit less might still be work that was bid during that time period. Robert J. Kelly - Sidoti & Company, LLC: Okay, so should the services division be in the black in 3Q and 4Q, or how do we progress on the operating line if we're down to 10%? James S. Porter: We anticipate that with the caveat just that uncertainty of the timing of project flow. But our expectation is that we see it in the black both quarters. Robert J. Kelly - Sidoti & Company, LLC: Okay, great. And then just -- we don't have a ton of history with the new segment breakout, so it seems like you're saying that the Architectural business, as a whole, will grow high-single digits in the second half of the year. How do we parse out the individual businesses now within the Architectural segment, or the old Architectural segment? What sort of growth rates should we look at for Glass, Framing Systems and Services for the second half of the year? James S. Porter: This is Jim, Bob. So part of it is, we also had kind of different growth rates when we look at kind of the second half of last year. So some of it is different segments that have a little bit different comps in terms of the year-on-year comparisons associated with it. So for example, our Architectural Glass segment had a pretty strong Q3 last year, but I think -- and, again, as we've talked, quarter-to-quarter timing in our Architectural businesses is often a bit difficult. It's not at all uncommon to see a few million dollars or more just kind of move 1 quarter to the other. But I think Q3, we probably expect maybe a little bit less second-half growth in Architectural Glass, and Architectural Services with Q4, a little bit stronger, but, again, that can move around a bit. Joseph F. Puishys: Bob, this is Joe. I would add that I expect, for all 3 segments in the Architectural side of the business, we'll have full year upper-single-digit growth year-over-year. And they are all pretty much in the same zone in that growth. So I'm very confident with the full year for all 3 segments being upper single digits. Within the Framing Systems business, we obviously had some headwinds of this year from one of the businesses, the windows business, but in spite of that, the -- and the second half is much improved. But in spite of that, that entire segment, because of the other 2 businesses, will also be up. And I include that in my comments when I say upper single digits. Robert J. Kelly - Sidoti & Company, LLC: Right. I understand, and it's just a little bit devil in the details, trying to nail down the 3 individual segments. The backlog in window that you had the project gap during 2Q, that's up 27%. Does that include -- or that's expected to be up 27%, does that include acquisition revenue or is that organic? Joseph F. Puishys: No, that's organic. Do not include that acquisition. And we kind of hit our trough in that gap or that hole in our backlog last December, so 8 months ago. And it's been up nicely in the first 2 months of the calendar year and then each quarter this year. So we're filling the hole we were living with. Robert J. Kelly - Sidoti & Company, LLC: Okay. And then so, you have your project gaps closing and, I mean, not a tremendous amount of acceleration in the end markets for the second half of the year, but some things are moving positive. Joseph F. Puishys: Correct. Robert J. Kelly - Sidoti & Company, LLC: And so the issue seems to be the indicators are positive, indicating some sort of improvement. I don't know when, but hopefully in the near-term, but it's not showing up in the McGraw-Hill data in the near-term or your, I guess, your quick-turn business? Is that the issue? Joseph F. Puishys: Yes. We continue to -- listen, McGraw-Hill has been consistent, frankly, consistently wrong, being they predicted this year to be double-digit growth. We didn't believe that. Of course, this year, that changed it. They're predicting the full year to be nominal growth, low single digits. And I expect that by the year's end, it will be better than that in the, let's say, the 3%, 4% range of growth in our end markets. And we'll be 5 points better than that. Because there's definitely indicators out there that it's better than the data suggests. Our business leaders are seeing good progress and our quick-turn businesses are seeing growth. But in some cases, it's regionally -- you have to be in the regions where the growth is happening. Like the south-central U.S. is an example where we're quite strong. Robert J. Kelly - Sidoti & Company, LLC: And then could you guys just update us on the progress, one, of the retrofit partnership with the Honeywells of the world, and then, two, how the Brazilian glass businesses is doing? Joseph F. Puishys: I'll take the Brazilian one. Jim can take the retrofit. The Brazilian business, which the results reside in the Architectural Glass business, is performing wonderfully. They have an all-time record in their backlog, which is obviously reported in the total $304 million backlog number. They're at a record high. The business is growing double digits. They are winning new business. And I could not be happier with the performance of the business. It's called Glassec Viracon, down in South America. So phenomenal growth and outperforming their end markets in -- the Brazilian markets, South American market can be lumpy and political situations come up now and then, but they've navigated through the uncertainties with continued growth and we -- it is one business where we are making capacity investments. James S. Porter: And, Bob, I'll speak to the retrofit initiative. We continue to be really excited about the potential of that initiative. And we've talked about it as kind of a multi-pronged approach, working with the ESCOs is one aspect of it. And I think we've talked in the past about what a long selling cycle that this, and that continues to be the case. Especially as the ESCO market is focused more on the government sector, both federal as well as municipal, university, school and health-care sector. And so we have booked a few million dollars in backlog this year. I don't think much, if any, of that is actually going to flow in revenues this year. But our pipeline of potential work really continues to grow and we're really increasing the visibility of potential projects. And then we're also looking at how we can interface directly with whether it's building owners, developers, property managers, those types of thing and really getting some nice visibility of potential pipeline of activity, as building owners consider retrofit initiatives in their activity. Joseph F. Puishys: And my confidence in that business opportunity, Bob, is -- continues to be very high. Robert J. Kelly - Sidoti & Company, LLC: Great. Is -- one final one. Is there a profit, an expected profit contribution from the window business acquisition this year? James S. Porter: This year, it's really expected to be neutral. It's a small contributor this year in revenue and pretty neutral in bottom line. It's expected to be accretive next year.

[Operator Instructions] Our next question comes of the line of Colin Rusch with Northland Capital Markets. Colin W. Rusch - Northland Capital Markets, Research Division: Can you talk about demand outside the U.S., particularly in Asia-Pacific and the EU? Joseph F. Puishys: The -- thanks, Colin. We don't -- we have a pretty healthy export business in both of our glass businesses, that being Architectural Glass and in our Picture Framing glass and acrylic business. Europe is -- we don't really do Architectural Glass in Europe, only in the Picture Framing. And that one, that's been a growth initiative for us. We just entered that segment 2 years ago, when we opened up our own facility in Amsterdam, a little over a year ago. We've got nearly 2 dozen distributors now and we had very nice growth in that business. So it's small in the total scheme of things, but that is a business that we expect to grow a couple million dollars a year for our Large-Scale Optical segment. So 2, 3, 4 points of top line growth attributed from our European expansion. That's a very immature market over there for Picture Framing, so that's our focus in Europe. In Asia, we do ship architectural glass to Asia and we continue to be awarded jobs by architects. And we have approximately $25 million, $27 million of export architectural glass, and it's primarily to Southeast Asia. And that market is doing well. We do not attempt to penetrate into China. Colin W. Rusch - Northland Capital Markets, Research Division: Okay, perfect. And one of the things you guys have talked about in the past is a backlog of projects that are kind of on hold. Are you starting to see any movement in terms of some of those commercial construction projects starting to move forward? And then how should we think about that as we go into the back half of this calendar year and into the first half of next calendar year? Joseph F. Puishys: Yes, some projects, Colin, were on hold, either being canceled or we've just taken them off our list. But the list of backlog projects -- bid projects that we've got out there continues to grow every quarter to all-time highs. I expect -- we try not to provide guidance on a quarterly basis, but I do expect our third quarter -- we've got a lot projects in contract review right now. And I do not see a path, anything short of a substantial growth in our backlog from our services business, so -- and in fact, we expect September to be a very strong month on orders. So I was hoping they'd closed the contracts in August, for obvious reasons. But as Jim says, we don't -- it can be very lumpy, and our trajectory continues to be upwards. So I don't think there's an issue with projects on hold. We continue to see project delays and there's no question the industry is waiting till the last-minute for orders. So -- but the projects are moving forward. Colin W. Rusch - Northland Capital Markets, Research Division: Great. And one last question from me. Can you talk about your win rates? So the volume of quotations that you've been putting out, are you seeing any trends in terms of the percentage of those contracts that you're winning? Joseph F. Puishys: Our win rates are improving in our businesses, mainly because we have a strong initiative in all of our projects businesses to define what is a good project for us based on our historical performance. So we have focused our sales efforts on segmenting the customer base for good projects, meaning we can execute well, they're a little more complicated, we can make more money. And our win rates have increased accordingly. And the term we view us with, you folks is the flight to safety and a flight fly to quality. And what we mean by that is, in the downturn, there were some installers that went out of business, that didn't perform. General contractors and glazers were left with a problem project and -- because they didn't know how well their -- the company they were dealing with, the subcontractor, was doing financially. Apogee businesses report their earnings and quality of their balance sheet every quarter, and it has helped our businesses, that being part of the publicly-held company with an outstanding balance sheet, we've seen contractors come to us for quality and dependability. So we feel we've picked up some business from that. Salmon rates are up, more so because of what we're focusing on. Colin W. Rusch - Northland Capital Markets, Research Division: Great. And can you just quantify what that percentage improvement is on that win rate? Joseph F. Puishys: I -- based on businesses going -- that maybe had a 20% win rate and now have a 28% win rate, I'd say we're improving our win rates by 25% to 40%.

Your next question comes from the line of Jon Braatz with Kansas City Capital. Jonathan P. Braatz - Kansas City Capital Associates: I apologize, I had to get off. Hopefully, you didn't answer this question. Joe, I know you started some initiatives to generate some additional revenue growth in LSO, especially in Europe and so on. I think we saw, what, 1% growth here in the quarter? What can you tell me about some of these initiatives, and are you happy with what you're seeing so far? Joseph F. Puishys: Yes. In the Large-Scale Optical business, our Picture Framing grass and acrylic, we had -- first off, Jon, we had really challenging comps in Q1 and Q2. And we've said Q3 and Q4, the comps are easier. It is a seasonal business. And based on the timing of holidays and weather, frankly, that business, more of the retail side. So we're very confident in -- that business will grow more in the second half. And they have a significant number of initiatives to grow the business. So Europe is regional expansion, of course. Our fine art markets efforts, which not only in Europe, but also in the U.S., so both international and fine art, small segments within that business, are growing double-digit this year. And they're looking at new markets for their applications of anti-reflective, ultraviolet-protected products. And I believe in -- certainly, in the strategic planning horizon, you'll see continued expansion of what we can offer with our technologies and our patented products. So we're confident in the second half, we'll see nice growth. And frankly, in end markets that are very flat, that is a consumer discretionary spend. So the end markets for that continue to be very flat. I'm really proud that they grew this year as they have against tough comps. So hopefully, take a breath here in the second half will be even better. Jonathan P. Braatz - Kansas City Capital Associates: So would you suggest that maybe the incremental growth that we might see will be coming from outside the U.S.? Joseph F. Puishys: We will see -- no, it's -- the incremental growth in -- outside the U.S. is substantial percent-wise, but it's off a small base. The -- what will move the needle is growth here in our U.S. market. But we'll see, percentage-wise, better growth internationally because it's a new space for us and we're penetrating.

There are currently no more questions in the queue. I would now like to turn the conference back over to Mr. Joe Puishys. Joseph F. Puishys: Okay, Brea, thank you. And, everyone, I appreciate your attention and time in this morning. I am very happy with our performance and feel extremely confident we are on the right trajectory to our goal over the next 2.5 years to get to that $1 billion and double-digit operating margins. And I really look forward to talking to you during this quarter, as we meet with some of you and certainly, look forward to reporting our second quarter results in about 90 days. So have a great day, everyone. Thank you.

Ladies and gentlemen, this concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.