Apogee Enterprises (NASDAQ:APOG) Q3 2020 Earnings Call

0:01 Ladies and gentlemen, thank you for standing by, and welcome to the Apogee Enterprises Fiscal 2020 Third Quarter Earnings Conference Call. At this time, all participant lines are in 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 to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. I would now like to hand the conference over to your speaker today, Jeff Hibson. Thank you. Please go ahead, sir.

0:32 Thank you, Shannon. Good morning and welcome to Apogee Enterprises Fiscal 2020 Third Quarter Earnings Call. With me today are Joe Pushis, Apogee's Chief Executive Officer, and Jim Porter, Chief Financial Officer. I'd like to remind everyone that there are slides to accompany today's remarks, which are available in the Investor Relations section of Apogee's 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 measures is provided in the earnings release we issued this morning, which is also available on our website. Also, I'd like to remind everyone that our call will contain forward-looking statements reflecting management's expectations, which are based on currently available information.

1:20 Actual results may differ materially. More information about factors that could affect Apogee's business and financial results can be found in our SEC filings. And with that, I'll turn the call over to you, Joe.

1:34 Thank you, Jeff, and thank you, everyone, for joining us this morning. By now, you have seen our release. Clearly, the results this quarter did not meet our expectations or yours. The shortfall in the quarter was primarily driven by operational difficulties and sales shortfalls in a couple of our framing systems business units. Jim and I will provide more detail on that throughout this morning. We are taking actions to address these issues and I'll provide more information on that in a moment, as will Jim. Beyond these issues, our other businesses and our other business units are well positioned and have had a number of positives in the quarter. Our architectural services segment continues to execute at high levels.

2:23 They're performing better than expected with strong project execution and operating margins approaching 10%. Just as importantly, the segment continues to win in the marketplace, adding over $100 million to its already record backlog during the quarter, a 20% increase from the last quarter, and a 40% increase from a year ago. And based on our current pipeline, we expect to see even more backlog growth in the fourth quarter in our services segment. With this backlog, our services business is positioned for solid top and bottom line growth for at least the next two years.

3:10 Large scale optical also continues to be a high performing business delivering on planned growth in the quarter. along with its usual impressive operating margins of 28%. In architectural glass, we continue to see improvement in operational performance in our factories, absorbing the startup costs of our new factory. And we successfully launched that new facility in Texas, executing our strategy to grow in the small project segment of the market. which is the largest part of the architectural glass market. We shipped our first orders out of this factory in the quarter and we have seen a favorable response from the market to our offering. This is critically important milestone in our strategy to diversify the glass segment, particularly as we see continued pricing pressure in our traditional core market from foreign competitors Thank you for joining us.

4:41 as we continue to pursue resolution of the remaining costs and claims related to this project. Finally, our view of the end markets remains fairly positive. I continue to view the market as bumping along the top. Our strong backlog growth and pipeline in architectural services points to continued healthy construction activity across the United States for the foreseeable future. and our other architectural businesses, it's more of a mixed story with strong bidding and quoting activity in some segments of this market and higher levels of customer-driven schedule delays than others. But overall, our view of the market has not changed and we still see conditions that support long-term growth for our businesses.

5:30 After a few months of concerns about the U.S. economy, things have turned more upbeat over the last 90 days. Turning back to framing systems, let me provide some details on the quarter and the actions we're taking. The quarter was impacted by lower sales volumes and operational difficulties in a few of our framing businesses. Jim will provide more detail on the specific drivers, but they include revenue shortfalls and manufacturing issues in just a subset of our architectural framing systems businesses. The results are disappointing, and I and our entire leadership team are focused on resolving the underlying issues. Last quarter, we announced that we had created a new overall segment leader for framing systems, charged with driving integration, synergies, and improved financial performance.

6:27 The six operating businesses in this segment will be led as one by one leader who took the reins in Q3. Given this quarter's challenges, we are accelerating these efforts, moving quickly but deliberately to drive positive change. First, we have made significant changes to the individual business unit leadership of several of these businesses, particularly in the underperforming businesses. In addition to these leadership actions, the team is developing an integration and performance improvement plan, considering every available lever. The plan is focused on three pillars, which are outlined on page five in our slide deck.

7:12 First, reducing our cost structure through procurement savings, overhead cost reductions, and minimizing controllable costs. Second, commercial excellence, which is focused on integrated product management, sales, marketing, and pricing strategies, along with applying the lessons learned from our architectural services segment to improve project selections. and third, operational and supply chain integration, optimizing our manufacturing capacity and footprint in buildings on our lean enterprise program to drive productivity and key value streams across these businesses in this segment. Last quarter, I also discussed our enterprise ride procurement savings program.

7:58 I'd like to provide an update on our progress in this initiative. Earlier this year, we retained Alex Partners, a leading global advisory firm to help us identify cost savings opportunities across our company. Over the past quarter, we have made significant progress. The scope of the project includes all categories of spend, direct material, indirect material and services, and freight, accounting for roughly half of Apogee's total cost structure. We analyzed 32 categories of spend, which have been divided in three ways. We are currently working through the three ways, implementing various strategies to capture the identified savings opportunities and this will come over the next several quarters.

8:46 As part of the initiative, we are moving toward a centralized procurement model that better leverages our scale and will drive synergies across our supply chain. To lead this effort, I have added a new role of Chief Procurement Officer. who will report to me and will join our team in January. Taken together, we expect the framing system's performance improvements and the procurement savings project to generate $30 to $40 million of annual savings. We'll begin to see some benefits immediately with the savings building as the projects mature over the next year. We plan to provide further details on the expected impact in fiscal 21 when we provide guidance in our year-end call.

9:35 Though we are reducing our outlook for the year, I remain confident in our long-term direction and see numerous opportunities to drive improvements going forward. We are taking concrete actions to address near-term performance issues and as I outlined earlier, much of our business remains healthy with solid execution, strong market positions, robust backlogs, and supportive end markets. Finally, initiatives like our Procurement Savings Project and our Small Projects Architectural Glass entry provide more reasons for optimism. With that, I'll pass it over to Jim, who will provide more details on the quarter and our outlook. Before I take questions, I'll return with a few additional comments.

10:20 Jim? Thanks, Joe, and good morning.

10:23 I'll begin with our consolidated results, which you can see on page 7 of our earnings presentations. Total revenue came in at $338 million down from last year's third quarter, primarily due to lower sales in architectural framing systems and at architectural glass. Operating margin of 6.4% was down from 8.8% in last year's third quarter, reflecting leverage on the lower sales volumes and the operational challenges in framing systems that Joe mentioned. Adjusted EBITDA came in at $33.7 million compared to $42.7 million in last year's third quarter. Net interest and other expense decreased to $1.8 million with lower effective interest rates resulting from the debt refinancing actions we announced last quarter.

11:16 The tax rate of 23.2% was down slightly from last year's level and our diluted share count dropped to $26.8 million from 28.2 million shares last year due to our share repurchases over the past year. Putting this all together, earnings were 57 cents per diluted share compared to 78 cents in the prior year quarter. Now I'll turn to segment results, which are on slide eight in the presentation. Framing Systems' revenue was $166 million compared to $181 million in last year's third quarter, This decrease was largely due to customer-driven delays and operational difficulties in a couple of businesses. Operating income was $6.3 million with an operating margin of 3.8% compared to adjusted operating margin of 7.5% in last year's third quarter.

12:12 Operating margins in the quarter were impacted by leverage on the lower volumes, Higher than expected manufacturing costs and some operational challenges in a couple of businesses. Specifically, we had higher than expected manufacturing costs on some projects in one of our curtain wall businesses, requiring a revised total estimated project cost with resulting project to date margin write downs. These projects remained profitable, but the margins had to be written down. This true-up had an approximately 300 basis point negative impact for this segment in the quarter. Only partly offsetting this, we did see nice operational progress at EFCO and continued growth and solid margins in our legacy short lead time framing businesses.

13:04 Architectural glass revenue declined 9% to $89 million. primarily due to lower volumes resulting from increased competition from overseas competitors as well as some customer-driven delays. Operating margin decreased to 4.6% compared to 5.9% last year. Q3 glass segment margins were negatively impacted by about 160 basis points from startup costs related to the new manufacturing facility for the small projects growth initiative. Year-to-date, we have incurred $2.9 million of our estimated $4 to $5 million of startup costs for this initiative. The impact has been partially offset by improved operational performance in our factories.

13:53 Architectural services continued to have great success with several new project wins during the quarter, increasing the segment's backlog to a record $607 million. As anticipated, architectural services revenue decreased to $69 million from $73 million in last year's third quarter due to the timing of project schedules. Operating income was $6.5 million with operating margin of 9.5%, down from 11.9% in last year's very strong third quarter with reduced operating leverage on the lower revenue base and a bit less favorable project maturity. Finally, large-scale optical grew its revenue by 4% to $24 million with good product mix in the quarter. Segment operating margin was 27.7% compared to 28.4% in last year's third quarter.

14:53 I'll cover cash flow in the balance sheet on slide 10. We had positive cash flow with $36 million of cash from operations in the quarter. Fiscal year to date, we have now generated $54 million of cash from operations. We are still below last year's level, primarily due to increased working capital related to completion of the legacy EFCO projects, which has reduced year-to-date cash flow by approximately $28 million. Overall, we expect continued positive cash flow in the fourth quarter. Year-to-date capital expenditures are $41 million, up from $34 million at this point last year, primarily driven by our investments in the new architectural glass fabrication facility and facility improvements at EFCO that were completed earlier in the fiscal year.

15:46 We now expect full-year cap-backs of approximately $55 million, which we've tightened from our previous guidance of $60 to $65 million. During the quarter, we used our excess free cash flow to pay down $21.5 million of debt, reducing our total debt to $251 million from $273 million at the end of the second quarter. As we move through the balance of the fiscal year, we'll continue to deploy free cash flow to reduce debt along with opportunistic share buybacks. I'll cover our outlook on page 11. We are adjusting our full-year outlook due to the lower than expected revenue and margins in the third quarter and softer expected results in the fourth quarter.

16:37 In the fourth quarter, we expect operational improvements in framing systems offset by lower revenues from increased customer-driven schedule delays, lower orders, and some seasonality. We now expect full-year revenue will be flat to down 1% compared to fiscal 2019 down from our previous guidance of 1 to 3% growth. We now expect full-year earnings per diluted share between $2.15 and $2.30 compared to our previous guidance of $3 to $3.20. And we continue to forecast a full-year effective tax rate of approximately 24.5%. We've also adjusted our segment guidance, which is on slide 12.

17:26 Our outlook for our framing systems has declined from the last guidance. Revenue is now projected to be down mid-single digits compared to our prior guidance for growth. This decline is from the revenue shortfalls in the third quarter. And in addition, looking to the fourth quarter, we experienced higher-than-normal customer schedule delays, moving revenue out of fiscal 20, and lower orders with some share loss in our U.S. window and wall business. Operating margin is projected to be between 5% and 5.5%, down from the prior guidance, due to the third quarter manufacturing cost issues and the lower expected volumes in the fourth quarter. As you heard from Joe, we are taking these shortfalls seriously, and we're taking strong actions to turn these great businesses around.

18:19 In architectural glass, our outlook has changed slightly. We now expect full-year revenue growth in the mid- to upper single digits, down slightly from our previous guidance due to higher customer schedule delays and the continuing impact of increased international competition for large projects. We do continue to see good success in the midsize project market. We are lowering our full-year margin outlook for architectural glass to approximately 6% compared to our previous forecast of approximately 7%, primarily due to reduced leverage on the lower volume. We continue to expect approximately $4 to $5 million of full-year startup costs for the new architectural glass growth initiative, which reduces full-year architectural glass margins by 100 to 150 basis points, which is included in the guidance provided.

19:12 We are expecting limited revenue in the fourth quarter from this facility as we ramp it for effective short lead time deliveries. And we expect this initiative will continue to ramp up in fiscal 2021 making positive contributions to both revenue and operating income. Our outlook for architectural services revenue is unchanged, forecasting a decline for the full year of approximately 10%. We now see full year operating margins of 7% to 8% above our previous forecast of approximately 7% due to strong project execution. The project wins and backlog bode well for the services segment as we look ahead to fiscal 21 and fiscal 22.

19:57 Finally, our full-year revenue outlook for large-scale optical is down just slightly, expecting low to mid-single-digit growth. We continue to expect operating margins of approximately 25%. With that, I'll turn the call back over to you, Joe.

20:13 All right, thanks, Jim. Let me close by reiterating that we are not satisfied, and I am not satisfied, with this quarter's results. We know where the issues are We're moving quickly, taking actions that will drive improved results. Performance in much of our business remains strong. We have a solid financial position with attractive leverage. We have a substantial number of non-recurring costs in fiscal 20. Additionally, our end markets remain supportive with indicators like the ABI, new construction starts, and employment gains all trending upward in the recent months. We like our business's position for fiscal 21 and beyond as we work to resolve the near-term issues. Finally, before we open up for questions, I'd like to acknowledge Jim's decision to retire from Apogee as his role as CFO.

21:11 Jim has been a key part of Apogee's leadership team for over 22 years, and I want to thank him for his dedication and many contributions over those years, and primarily for being my friend. We are beginning a search for his successor, and Jim has agreed to stay on in his current role through the process to facilitate a smooth transition. Jim, we thank you. I thank you for everything you've done for us and for me. With that, I'd like to ask Shannon to open up the call for your questions. Shannon? Thank you. Thank you. As a reminder, to ask a question, you will need to press star 1 on your telephone. To withdraw your question, press the pound key. Please stand by while we compile the Q&A roster. Our first question comes from Chris Moore with CJS.

21:58 Your line is open.

21:59 Hey, good morning, guys. Yeah, maybe we could start with framing. Yeah, so the customer-driven delays, is there any common denominator in terms of, you know, kind of what was driving that?

22:15 Yeah, Chris, this is Jeff. Excuse me. You know, as you know, there's a variety, but I'd say... If we did a Pareto of the top drivers, the number one is the schedule on the job sites themselves. And, you know, in a number of cases, our customers or kind of as we go further up the kind of value chain, if you will, on a construction project, availability of labor has resulted in the projects just not progressing as fast and just the schedules on those projects move out. Similarly, you know, we've – and these are kind of normal issues that we just saw a higher rate of it. is that projects that were scheduled to start, the general contractor was too optimistic about ability to get the project started and the start timeline of those projects has moved out. So those are the top two reasons.

23:03 As I said, that's kind of our industry and those happen all the time, but we've just seen a higher level of those types of scheduled delays.

23:14 Gotcha. In terms of the The framing challenges that were perhaps a little bit more self-inflicted. Can you kind of break out? It sounds like some of the projects perhaps were mispriced and some where there were operational issues that you didn't anticipate, say, a quarter ago, something like that. Can you just talk to that a little bit more?

23:40 Yeah. Chris, this is Joe. Hello. In one of our curtain wall businesses, manufacturing business, not our installation services, we're pretty darn full in the factory. We've had some complex projects at a time where the factory is very full. In the third quarter, it became apparent to the business that the margin expectations were not going to be met. The challenges were... Thank you very much. We believe we're about to win some more business that's very similar to this that's been priced substantially higher to reflect the learnings of the business.

24:48 But this is really two primary projects in one of our curtain wall manufacturing businesses. And I believe the business has learned its lesson and is pricing accordingly going forward.

25:01 And I'll just add, you know, how specifically is There are a couple of projects that had a higher degree of manufacturing complexity that just became more of a challenge than was originally estimated. And as Joe mentioned, when that started happening in a kind of at-capacity manufacturing environment in that facility, it became difficult to overcome and offset the beginning manufacturing costs for those projects.

25:32 Chris, one of the organization changes we made was we've installed a new leader of our two curtain wall manufacturing businesses who frankly grew up in the services segment doing large complex projects for companies like our Harman services segment business. He's been a direct report to me for the last year and a half running our Global Operations, and this gentleman has moved into the leadership position of our two curtain wall businesses, and I'm expecting him to have a huge impact on addressing issues like we just talked about.

26:17 And those two primary projects, I mean, how big are they? Do they extend, you know, well into fiscal 21 or give any sense there?

26:27 Yeah, so, I mean, these projects will be – largely complete by early, probably the first quarter of fiscal 21. I mean, a smaller portion of it will carry into probably the second quarter, but a majority of it will carry into fiscal 21. So as we talked about, we had to do a true-off, which really was a charge in the third quarter. In the fourth quarter now, we'll see margin on these projects, but just that lower margin then was originally for these and kind of wrapping up early next fiscal year.

27:08 Gotcha. I appreciate it. I'll jump back in line. Thanks, guys. Thanks, Chris. Our next question comes from Eric Stein with Craig Hallam. Your line is open.

27:17 Good morning, everyone. Good morning. So just coming back to these two projects quickly. So, I mean, just maybe talk about your confidence level that the Thank you very much.

27:57 We obviously went to DEF CON 5 on these projects and put our top people at Apogee involved in this. We believe we have taken the margin write-downs to the level we can perform for the completion of the projects. As I mentioned, they are not lost projects but at substantially less margin than should have. And as I mentioned, as we're going forward, we're pricing substantially higher projects. on similar business going forward. We can make the product. It is complex, but it is certainly in our wheelhouse. So I'm confident in both the charges behind us and that we can finish these projects as is with the current margin assumptions and that we're going into backlog.

28:47 We'll be at normal margins.

28:49 Okay, got it. And then maybe on the The cost reductions of $30 to $40 million. I might have missed it, but did you call out a time frame, whether it's later in fiscal 21 when you think you'll be at that run rate?

29:07 Certainly by the end of fiscal 21. We're not providing guidance for fiscal 21 now. I can say that there will be a substantial favorable impact in fiscal 21 over fiscal 20. Some of the savings begin – relatively immediately, and through the first and second quarter, we'll get a decent-sized piece of that. But we're just not going to provide the full impact of 21, but it will be fairly substantial.

29:37 Okay. No, that's great. Thanks. And then lastly, I mean, it actually sounds like, you know, kind of nice that EFCO doesn't sound like that's really part of, you know, the missteps in framing. So I guess confirming that with you, but also I know that the last problem project, you've kind of talked about a few quarters of residual work. So just any thoughts about are there any risks associated with wrapping that project up and kind of putting that behind you?

30:14 Well, EFCO has been performing well this year and meeting my expectations. The building is primarily enclosed, which means the windows and doors are almost all installed. On any project, there's what's called leave-outs, where the elevator shafts that go up the tower have to be removed, and then we complete the work. That's always standard practice in the construction world. For the most part, ESCO is completed with that project. They have some small number of units to make. And, you know, listen, it's been a terrible project for us. It's been a financial blow. And I won't say that it's completely risk-free, but we believe we've got a good cost to complete estimates in our forecasts.

31:10 We continue to, as I mentioned in the call, we did have a modest but a net gain on some of the things we've been going after in recoveries. We'll continue to work on claims against us and claims we have. I believe our forecast is balanced. A project is never risk-free until you've completed the project, which won't be until the first half of calendar 2020. But we're kind of on the 10-yard line, and things have gone according to plan.

31:46 And then, Eric, just your opening comment and question about kind of the core EFCO business. As Joe said, they are performing to our expectations. We are seeing the improved productivity that we've been looking at in that business. And operationally, we're seeing improvements, and so our focus now is the emphasis on from the operations side of the business to really driving kind of the top-line opportunities in that business.

32:14 Okay, thanks.

32:17 Thanks, Eric. Our next question comes from Brent Bailman with DA Davidson. Your line is open.

32:24 Thanks. Good morning. Brent, morning. Joe, you know, there's been this process of trying to kind of integrate all these subsidiaries within the framing business. I guess I wanted to take a step back and sort of ask, you know, the results here to some degree are a consequence of trying to do that, and does it give you any pause in terms of what you're trying to do there or sort of change the game plan at all for that?

32:51 Well, listen, Brent, first off, the performance for this segment was not acceptable. It is not a consequence of our effort to integrate and consolidate this We are just getting started in that effort. We're being careful that our goal is not to alienate customers or mess up the business, the performance issues. We believe the leadership changes we've made and that we're adding by creating the segment leader role is going to help us avoid these kinds of misses going forward. It's a big company. These six businesses are In the same operating segment, we have the opportunity to do a better job leveraging our manufacturing footprint, leveraging our product offering so that we don't launch new products in one business if we can leverage the same baseline products in another.

33:53 All these things are in front of us, not behind us, and there was no causal factor on this quarter's performance because of our efforts to create this one operating segment.

34:06 Okay. And sort of parsing out the businesses that have been performed to your expectations, is the rest of the business kind of in that target, low double digits, margin range that you want it to be at?

34:18 Yes.

34:20 Okay. And then I guess on Glass and the commentary about the foreign competition, I know they've been kind of in and out of the market, but I guess what markets are you primarily seeing that? And I think in the past it It's intensively been on the eastern seaboard, but I thought kind of the northeast was picking up for you. So maybe any comments there?

34:38 Well, the northeast and the Midwest, it's primarily the large projects, the large towers. You know, I've been pleased that, you know, the leader of that business and I and Jim, we spent a lot of time going over what kind of margins we're prepared to take. We, of course, will look at lower margin projects if we believe it's strategically a good move, but we are also prepared to walk away and not chase low margin work. That company did that at Glass Business back 10, 11 years ago, and that's why Apogee was losing money back in fiscal 11. We're not going to do that. It is a It is a challenge on the large monumental towers. Lead time is not an issue, and product can come from virtually anywhere in the world and meet the lead times.

35:33 We have good competitors around the world, and with the dollar-euro exchange rate at 111, it has opened up the door for foreign competition. The markets are pretty poor in our end markets in Europe, and this has become a good landing spot for that competition where you We accept competition. That's the world we all live in. Hence our strategy to move into the mid-market and most recently into the small project segment. The small project segment is actually larger square footage than the combination of the large and the mid-market. So it's a strategic imperative for us. But we feel this competition in large projects is here for the foreseeable future.

36:21 until we start to see recovery in their markets and hopefully a more balanced exchange rate. And maybe I can return a favor someday. Okay.

36:32 And on the small project facility, congratulations on getting that up and going. I guess any early thoughts on what you expect from that business in fiscal 2021? I know it's ramping up. And then kind of when you think that sort of gets to optimal? and the margins you expect from the business.

36:52 Yeah, I can't provide guidance for fiscal 2021. What I can tell you is the orders, the inbound inquiries and the orders bode well for us achieving or beating our investment thesis for that investment that we made. And they're producing excellent product. It's highly automated. It's amazing quality and performance. We have talked about that operation having a

37:45 potential capacity of a range of $30 to $50 million of annual revenue. It's a big range, but a lot of it depends upon mix and those types of things and would expect it to take a couple of years to ramp up to those levels. Okay.

38:02 The customer feedback we've received, Brent, on our initial shipments has been phenomenally over the top positive. We're pleased with the performance.

38:13 Okay. Thank you. I'll leave it there.

38:17 Our next question comes from Julio Romero with Sedoti. Your line is open.

38:30 Hey, good morning, everyone. Julio. Hey, first off, Tim, congratulations on the retirement and all of your success at Apogee.

38:39 Thank you, Julio.

38:41 I guess on the overall guidance, did I hear you narrow your guidance range for the consolidated margin? I mean, you gave us plenty on the segment guidance, but just I'm sure if I missed anything on the consolidated margin there.

39:00 No, I mean, we didn't call that out.

39:03 Okay, fair enough. I guess maybe on the glass segment, you talked about the large-scale projects and that impact, but you also mentioned the customer-driven delays. Can you just elaborate on that at all and if those are expected to persist into the next fiscal year?

39:24 This is Joe. I'll talk about glass, and Jim can talk about the project delays or reiterate what he said. The project delays was within our framing systems segment. and Glass. That has not been something we called out here. No, I'll just repeat. Our Glass businesses performed well. Their margins absorbed the startup costs in Q3, and there'll be more startup costs in Q4 as we wrap this program up with the entry into the small projects. Very pleased with the performance. Volumes were off a little bit due to the share loss at the top, but Not dramatic. You know, we'll continue to fight that battle in F21 as we enjoy some revenue and margin pickup on the smaller and mid-segment project work. But the project delay issue was in a couple of our curtain wall projects in Framing Systems in the mix of their projects.

40:23 Got it. I thought I had heard you call the same out for the glass business, but... I guess maybe just staying on that glass business, you know, on the new facility in Texas, can you just elaborate on, you know, I assume you'd have an ability to self-supply more glass to, say, EFCO and maybe some of your other businesses, and can you just talk about how that goes, maybe hand-in-hand with how you're thinking about framing integration opportunities next year?

40:51 Yes, you're correct that that business has the capability of supplying glass to our intercompany businesses, and that will be part of the $30 to $50 million revenue profile that Jim talked about that we believe can come from that factory. We have great partners in our supply base for that business and are supporting them well with this new volume that we're bringing in. But that will be part and parcel to our growth going forward. As I mentioned, we have Several new leaders in many of our framing systems businesses that are folks that are coming from the Apogee ranks and businesses. So I've got more and more a mix of leaders that have come from other business segments, and I believe it promotes continued cross-Apogee leveraging of our capabilities. And I'm looking forward to more and more cross-business unit and across the segments coming

41:57 Thank you all. Thank you. Once again, ladies and gentlemen, if you wish to ask a question at this time, please press star, then 1 on your touch-tone telephone. Our next question comes from John Bratz with Kansas City Capital. Your line is open.

42:17 Good morning, Joe. Jim. Good morning. The strategy behind the architectural framing business was that it's a simpler business. It will help protect you more when the cycle turns down. Yet, this business is the one that's causing the most difficulty. Has the business changed at all or is it more complex and more susceptible to Thank you very much.

43:19 A couple of businesses in that segment that are focused on larger projects, a little bit of complexity, and are susceptible to schedule issues on the project site. We do have a nice balance of very small project focus, our storefront and entrance business, kind of reliable, less lumpy, doesn't move You know, substantially from one quarter to the next, they've been performing consistently, and then we, all the way up to some large curtain wall projects, and those are the ones that have been a concern this quarter. You know, we have good experience in large curtain wall projects.

44:11 A lot of that experience comes out of our service segment. I mentioned that our new leader of our Two curtain wall businesses in framing systems. Basically comes from our installation services segment and with great experience. And I believe we can eliminate some of these surprises with more consistent manufacturing performance in those two businesses. We have a good mix. We don't fire in all six cylinders at every quarter. This was a tough quarter for two of the larger businesses. that we couldn't offset with performance in the other four, but the mix is a good mix for us in the long term, and I believe we needed to make some changes with some of our leadership teams.

45:01 John, the majority of the revenues in the framing systems segment is on the smaller projects, whereas we've talked, we do continue to see growth in good margin performance and is the focus for and many more in that segment going forward.

45:17 Jim or Joe, would you imagine as you look ahead that given these current difficulties that the mix may change or would you like the ratio where it stands today?

45:35 I don't think the mix will change substantially. We will do a better job of having our growth focus Thank you very much. through a history of forensics on where we performed well and where we didn't on large projects that I mentioned in this call that we are going to leverage the learnings from that business to do a better job of project selection inside of our framing system segment.

46:31 Our strategy is a growth strategy focused on better project selection, so we start with... and many more.

47:06 You know, I mean, that will be evaluated as we develop our plans for next year. Our intention at this point, at least for fiscal 21, is to hang on to the majority of that.

47:19 Okay. All right, Jim. Thank you.

47:21 Yeah, and, John, if you break off, I'll just say that to add to that, we will obviously look at short return investments and to the degree we can drive further costs out of the business. If that takes some investment, we will apply some of the savings to that opportunity. So thank you. Thank you, Joe. Do we have any more calls, Shannon? Our next question comes from Bill Desolam with Titan Capital. Your line is open.

47:50 Thank you. I actually wanted to follow up on that cost savings question. Would you characterize or break out, if you would, that $30 million to $40 million gap in terms of where you are anticipating the savings coming from, number one. And then secondarily, what component of it are you just rock solid on and then how much potential upside is there to that $30 to $40 million number?

48:20 So I'll provide a little color as I said we're not providing guidance for F-21, but I can tell you that Of the 30 to 40 million, the larger piece of that pie is our procurement initiative. I'm not going to say it's easy because it's certainly not, but a lot of heavy lifting has been going on for the last three months with our partner, the global firm that's helping us that I mentioned. We have identified a substantial portion of that and have more to go. And we'll be implementing procurement savings effectively immediately. So I feel really good about the component of that 30 to 40 that's on the procurement side.

49:17 There's a little more heavy lifting to do on the framing systems synergies. But We feel really good about the opportunities and let's face it, we have a low basis. We used to operate framing systems at substantially higher margins. I think getting back to those margins is certainly not an unrealistic expectation to get back to where we should be and then drive synergies. So I feel good about the $30 to $40 million or we wouldn't have put it in our Guidance. I feel good that a big chunk of that is coming from procurement, which is a little bit easier to identify, and there are also some savings that will have to come from some really hard work within framing systems.

50:11 A substantial portion will be felt in fiscal 21, and Bill, that's about as far as I can take it on today's call.

50:20 I'm going to see if maybe you'll go just a little bit further, even though I heard what you just said. What aspect beyond 30 to 40 million is there in terms of the potential, but frankly today you are simply less clear on and therefore aren't able to discuss quantitatively? Is there a meaningful component that would fall into that category? or has this been pretty well vetted and so you don't have a lot of if I may call it murky future opportunity?

50:57 The range that we put in this discussion today is not murky. It's fairly well identified. There is obviously a goal to drive much higher cost savings beyond that through continued hard work on Product Line Management, Continued Procurement Savings. This effort with Alex Partners is the beginning, not a one-shot deal. I mentioned I'm hiring a chief procurement officer to make sure we deliver on these savings and then drive phase two and phase three going forward, meaning it's just the beginning for procurement.

51:42 I'm not going to tip my playbook to our competitors. with regards to the commercial opportunities that I expect my framing system leader and business unit leaders to drive. Those are not quantified in that $30 to $40 million. So, yes, I expect to have long-term gains from operating that segment as one operating unit or one operating segment with different brands and our discrete factories that we have today. Thank you. Thank you, Bill. Thank you. And I'm showing no further questions at this time. I'll turn the call back over to Joe Pusch for closing remarks.

52:27 All right. Thank you, Shannon. Okay. I will end where I started, which is we get it. I know we disappointed. I feel a strong commitment to seeing this improvement turnaround happen. I believe it will happen rapidly. And as I mentioned, I think we went through fiscal 21 with some substantial tailwinds. on our side, both from the non-recurring cost and project cost we've had this year, the elimination of the performance surprises, and the substantial backlog increase you see at Apogee, primarily driven by framing systems, but also, I'm sorry, by our services segment, but also what we're seeing in future orders for framing.

53:15 And our new project in glass, I believe, and you have my commitment to work tirelessly to achieve that. So I thank you for your attention today. Once again, I'd like to congratulate and thank Jim for his service to our company, his tireless service, and I wish you all a happy holiday and a happy year end and a safe one. Thank you very much. Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.