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Edited Transcript of APOG earnings conference call or presentation 27-Jun-19 1:00pm GMT

Q1 2020 Apogee Enterprises Inc Earnings Call

MINNEAPOLIS Jul 1, 2019 (Thomson StreetEvents) -- Edited Transcript of Apogee Enterprises Inc earnings conference call or presentation Thursday, June 27, 2019 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* James S. Porter

Apogee Enterprises, Inc. - Executive VP & CFO

* Jeff Huebschen

Apogee Enterprises, Inc. - VP of IR & Communications

* Joseph F. Puishys

Apogee Enterprises, Inc. - CEO, President & Director

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Conference Call Participants

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* Brent Edward Thielman

D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst

* Christopher Paul Moore

CJS Securities, Inc. - Senior Research Analyst

* Eric Andrew Stine

Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst

* Jonathan Paul Braatz

Kansas City Capital Associates - Partner and Research Analyst

* Julio Alberto Romero

Sidoti & Company, LLC - Equity Analyst

* William J. Dezellem

Tieton Capital Management, LLC - President, CIO and Chief Compliance Officer

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to the First Quarter 2020 Apogee Enterprises Inc. Earnings Conference Call. (Operator Instructions)

It is now my pleasure to turn the call over to Jeff Huebschen. Please go ahead, sir.

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Jeff Huebschen, Apogee Enterprises, Inc. - VP of IR & Communications [2]

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Thank you, Andrew. Good morning, and welcome to Apogee Enterprises' Fiscal 2020 First Quarter Earnings Call. With me today are Joe Puishys, Apogee's Chief Executive Officer; and Jim Porter, Chief Financial Officer. I'd like to remind everyone that there are slides to accompany today's remarks, which are available in the Investor Relations section of 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, and that's 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. 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.

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Joseph F. Puishys, Apogee Enterprises, Inc. - CEO, President & Director [3]

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All right. Thanks, Jeff. Good morning, everyone. Thanks for joining our call today. The first quarter was a solid start for our fiscal year. We hit on our commitments. Backlog is up. We're holding guidance, and we're progressing on strategic initiatives while launching new ones, which we'll touch on today. And finally, we're pursuing cost recovery on the charges from the prior quarter. We still have a lot of work ahead of us but our progress is excellent.

This morning, I'd like to share some perspectives on what we are seeing in the end markets and discuss the highlights from the quarter and progress on some of our key strategic initiatives. And then, of course, I'll turn it over to Jim for more specific details on the quarter and our full year guidance.

First, the economy and the market conditions. Let me start with some observations about the economy and the end markets we play in. I continue to describe the overall market condition in our sector as bumping along the top, a healthy environment in which Apogee can continue to grow. Underlying economic conditions remain stable. While economic growth has slowed a bit, the U.S. still averaged over 150,000 new jobs per month over the past quarter. And we continue to see employment gains in the office-occupying sectors, education and health care, the most important market segments for Apogee.

Looking specifically at commercial office market, office vacancy rates are at decade low levels and rents are moving higher, both of which point to continued demand for new office construction. Demand for multifamily housing also remained strong with new unit construction forecasted to remain at historically high levels in 2019. Additionally, the recent downward trend in interest rates should be supportive for new building products -- projects, I'm sorry. Of course, there is some macro uncertainty, and the market often overreacts to bad news, but overall the economic situation is positive. We monitor the industry indicators like Architectural Billings Index, the ABI, as we call it, the Dodge Momentum Index and new construction starts. While these indicators have fluctuated a bit in recent months, the long-term trends have been favorable. The ABI has been positive 19 of the last 20 months, 40 of the last 48 without the peaks and valleys, and this is key to sustainable growth in end markets and stability. It's been flattish in recent months, but we're okay with flattish, it's at stable, healthy levels today. New construction starts also remain at a healthy level.

I'd like to revisit a point I made last quarter. While new construction has improved over a relatively long period of time, the pace of activity has fallen short of previous up cycles. And on a square-foot basis, construction activity in the nonresi sector still has a long way to go to reach prior peaks. And although the U.S. economic recovery is now approximately 10 years in the making, commercial construction recovery is about half of that. Also, we're not seeing overbuilding or speculative building that might indicate top of market cycle. We continue to see a nice balance of new construction starts tied to tenant demand.

The favorable economic and market environment is translating into solid demand for Apogee's products and services. We continue to build backlog, especially in our Architectural Services segment. We booked several significant new projects during this past quarter. We're winning business across our geographic footprint, and we're winning business in all of our key market subsectors. Based on customer commitments and our sales pipeline, we could see further backlog growth for services in the second quarter, certainly depending on the timing of contracts.

In our shorter lead-time businesses, customer activity remains healthy. We have good sales pipeline and we're seeing solid quoting and bidding activity. So overall, we believe the market backdrop supports top line growth for Apogee this year and into fiscal '21.

Okay. Let's turn to our highlights and strategic initiatives. Looking at the first quarter, I'll touch on a few key highlights. First, we made significant progress toward completing the legacy EFCO projects that we'd been talking about in prior releases. The last remaining project proceeded as planned in the quarter, and we're now several steps closer to the finish line. On this last project, we are now more than 95% complete with manufacturing for the project, which is being led by EFCO. We are more than 70% complete with installation, which is being managed by our Architectural Services team. We expect to be largely finished with this project by the time we report our second quarter results and with some limited activity continuing into the fourth quarter, typical of all commercial projects. We also continue to work on potential cost recoveries that could offset some portion of the charge we recorded last quarter. I'm also pleased with the operational progress we made at EFCO in the quarter. We're making headway on operational improvements and lean initiatives which are driving steady increases in key quality and productivity metrics. Frankly, EFCO had an excellent quarter.

In the second quarter, we expect to complete a facility-upgrade project at EFCO, which will improve material flow out of our factory and allow further productivity inside the factory itself. This will positively impact results in the second half of the year. In addition, we continue to take steps to drive synergies in the Framing Systems segment. Our the past several years, one of our strategic priorities has been diversifying Apogee's revenue base to unlock new growth and to make the company less dependent on the more cyclical, large project segment of the nonresi construction market. Over 5 years ago, I said our growth structure in motion around driving better than market growth in our Framing Systems businesses by way of new product introductions, new markets and geographic expansion. And by focusing Apogee acquisition efforts in this segment, our legacy businesses achieved amazing growth and bottom line results. And we executed 4 acquisitions in this segment including a very successful product line tuck-in. We focused on expanding Framing Systems segment not at the expense of our other segments, but because Framing Systems had the biggest opportunity for long-term revenue growth and margin expansion. Framing operates in a more fragmented market with numerous opportunities for growth through share, geographic expansion and new product innovation. The segment also offers substantial opportunity for margin expansion. We've executed our strategy through both organic growth and by making these key acquisitions to increase scale and add capabilities in Framing. As we've discussed on previous calls, we inherited some unexpected problems with the EFCO acquisition, which slowed our progress over the past 2 years, but we are putting these issues behind us now and we're turning our full attention to realizing the margin in growth opportunities in Framing Systems with synergy efforts in both the revenue and cost parts of the P&L. We'll be taking concrete steps to drive synergies and reduce costs over the next several quarters. This will include increased supply-chain integration among several of the framing businesses, insourcing some materials we currently purchase outside and other purchasing synergies. These actions will drive long-term benefits, it'll carry some upfront cost, which will be likely incurred in the second quarter. And Jim will talk more about that in his guidance comments.

In Architectural Glass we had a very strong year-over-year sales growth and margin expansion. Over the past 3 quarters, the Glass segment has averaged $100 million in revenue, which reflects steady demand and improved throughput. The new Architectural Glass growth initiative that I highlighted last quarter is also progressing as expected and we plan to begin operations in our fiscal third quarter.

I mentioned the strong order flow we saw in Architectural Services, adding another $39 million to the segment's record backlog. As has been the case in the past several years, our Services segment is focused on project selection, disciplined pricing and execution excellence at the job site. And this business continues to demonstrate amazing discipline and results. We're concentrating on those projects that best fit our capabilities and offer the best opportunity for solid profitability. And the entire Services team is focused on execution excellence through all phases of a project's life cycle. Based on the schedules for projects in backlog, we continue to believe the Services segment is well positioned for revenue growth and even higher margins in fiscal 2021.

And finally, our Large-Scale Optical segment is well-run gem of a business that continues to deliver strong performance, led by an amazing leadership team with a strong leadership potential -- position. This segment always has quarter-to-quarter variability but on an annualized basis, it generates consistent profitability and cash flow. Through the first quarter, the LSO segment is on track to meet our full year growth plan and margin targets.

So overall, a good start to the fiscal year. We feel confident about how we are positioned for the remainder of the year.

And with that, I'll pass the call over to Jim, who'll provide more details on the quarter and our outlook. And then I'll take questions from you and wrap up with some final comments. Jim, you have the con.

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James S. Porter, Apogee Enterprises, Inc. - Executive VP & CFO [4]

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Thanks, Joe. Good morning, everyone. I'll begin with our consolidated results, which you can see on Page 5 of our earnings presentation. Total revenue grew 6% to $355 million compared to $337 million in last year's first quarter, primarily driven by the significant growth in Architectural Glass. Operating margin of 6.5% was in line with last year, but down from adjusted operating margin of 7.4% in last year's first quarter. As a reminder, adjusted results in the first quarter of fiscal 2019 primarily excluded the amortization of short-lived, acquired intangibles. These intangible assets have now been fully amortized so there's no similar adjustment in the current fiscal year.

EBITDA came in at $34.1 million compared to $35.5 million of adjusted EBITDA in last year's first quarter. Interest expense increased to $2.6 million from $1.8 million in last year's quarter by the higher debt level. And the tax rate of 24.4% was in line with our fiscal 2020 guidance of approximately 24.5%. Putting it all together, earnings per share were $0.58 compared to $0.54 in last year's first quarter, were $0.60 last year on an adjusted basis.

Now I'll cover the segment results, which are on Slide 6. Framing Systems revenue was $181 million, up slightly from last year's $179 million. Operating income was $12.3 million with an operating margin of 6.8% compared to 6.9% last year and adjusted operating margin of 8.5% in last year's first quarter. The lower margin was primarily due to a less favorable project mix as we expected coming into the year as well as a lower volume leverage in a couple of locations. Framing Systems' backlog of $407 million held near historically high levels. The Architectural Glass segment had strong year-over-year improvements as the segment continued to progress past the workforce and productivity issues that impacted fiscal 2019 performance. Glass revenue grew 30% to $100 million, driven by strong demand and improved throughput in our factories as well as a weak prior year comparison.

Operating margin improved to 6.4% compared to 2.1% in the first quarter of fiscal 2019, primarily driven by operating leverage on the increased volumes. Glass segment margins in the first quarter were negatively impacted by approximately 60 basis points from the early startup costs related to the new growth initiative as we begin to hire staff and incur facility expenses for the new operation.

As we had expected, Architectural Services revenue decreased to $65 million from $71 million in last year's first quarter due to the timing of projects. Operating income was $4.6 million with operating margin of 7% compared to $5.2 million and 7.3% in last year's first quarter. As Joe mentioned, Services backlog increased to $483 million.

The slide on Page 7 illustrates the strong backlog growth the segment has achieved over the past few years. Given current project schedules established by our customers, we expect almost 40% of Services backlog will be converted to revenue in the remainder of fiscal '20, with the balance in fiscal 2021 or '22. As Joe mentioned, at this point, it looks like Services is set up for another strong year in fiscal '21. And we continue to have a good pipeline of opportunities that could further increase backlog in the coming quarters.

Large-Scale Optical segment results were in line with our expectations with revenue increasing 2% to $21 million and the segment operating margin of roughly 20%. First quarter margin in Large-Scale Optical is below last year's level, primarily driven by the timing of production schedules. In this small segment it is typical to see operating margin bounce around quarter-to-quarter. We continue to expect full year operating margin in the 25% range that the Large-Scale Optical segment has achieved over the past several years. I'd also like to mention that, as anticipated, corporate expenses were higher in the quarter due primarily to increased legal and advisory expenses compared to fiscal 2019.

Now I'll turn to cash flow and the balance sheet. Turning to Slide 8. Operating activities in the first quarter used $9.7 million of cash. Cash flow was negatively impacted by our normal seasonal working capital uses, timing of incentive-based compensation and insurance bases -- payments primarily. Also, as we mentioned last quarter, progress on the legacy EFCO project continued to drive increased working capital, which caused a roughly $15 million drag on operating cash flow this quarter. Capital expenditures were $11 million, primarily driven by the investments for productivity in Framing Systems at EFCO and new capabilities in our Architectural Glass segment. Also during the quarter, we repurchased 532,000 shares of stock for $20 million. And we paid out $4.6 million of dividends.

Total debt increased to $293 million or 1.8x trailing 12-month adjusted EBITDA. Subsequent to the end of the first quarter, we successfully amended and extended our revolving credit facility, extending the maturity out to 2024, increasing our credit limit to $385 million from $335 million and securing some favorable terms and conditions. The changes to our revolver give us increased financial flexibility and will also lower our borrowing costs. We expect cash flow to improve in the remainder of the fiscal year, but it will likely stay below last year's level, primarily due to the increased working capital requirement until completion of the legacy EFCO project.

As a reminder, we have continued efforts to recover some of the costs recorded in last quarter's charge. And any cost recoveries that we're able to secure will be favorable to the outlook for both cash and earnings. We continue to expect full year capital expenditures of $60 million to $65 million, and we'll look to deploy excess free cash flow to pay down debt. We will also continue to evaluate opportunistic share buybacks.

Now I'll turn to our outlook, which is on Page 9. We are maintaining the full year guidance that we provided last quarter. Let me offer some additional details on the outlook. First in Framing Systems, we expect revenue growth rates to improve in the second half of the year, driven by project timing as well as easier prior year comparisons. We continue to expect margin improvements will be weighted to the back half of the fiscal year as we transition through a less favorable mix and the initiatives we have underway across Framing Systems begin to drive positive contributions. The third quarter is traditionally the strongest quarter for Framing Systems, which we expect to be the case this year. As we implement some new supply chain and purchasing synergy actions that Joe mentioned, we are expected to see some upfront costs, which will have a roughly 100 basis point headwind to Framing Systems segment margins in the second quarter. This is expected to be offset by benefits in the second half of the fiscal year, starting in the third quarter.

In Architectural Glass, we continue to expect full year revenue growth of approximately 10%. The first and second quarters will have the largest year-over-year growth rates due to the easier prior year comparisons. Also, we continue to expect approximately $4 million to $5 million of startup costs for the full year for the new Architectural Glass growth initiative, which will reduce full year Glass margins by 100 to 150 basis points. I noted that we saw some initial impact in the first quarter. These startup costs will have the greatest impact in the second and third quarters and will begin to generate limited revenue in the fourth quarter. We expect this new startup initiative will ramp quickly in fiscal 2021.

In Architectural Services, we continue to expect a 15% decline in full year revenue compared to fiscal 2019, due to the timing of projects in the backlog. And as we discussed last quarter, this will have a significant impact on the operating leverage and margins compared to last year as we cannot aggressively cut overhead costs that are needed to execute the segment's robust backlog and project pipeline in the future. Based on the current project schedules we have, we expect the second quarter will be the lowest revenue quarter, at -- lowest revenue and margin of the quarter for the year for Architectural Services with performance gradually improving in the second half of the fiscal year. And finally, in Large-Scale Optical, we continue to expect mid-single-digit full year growth and operating margins of approximately 25%.

With that, I'll turn the call back to Joe.

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Joseph F. Puishys, Apogee Enterprises, Inc. - CEO, President & Director [5]

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All right. Thank you, Jim. To wrap up, this was a nice start to our fiscal year. And we're making good progress in a number of areas that should position us for further top line growth, improved margins and stronger earnings and cash flow for the remainder of the year. Looking longer term, healthy market conditions, our backlog and our pipeline of operational improvement initiatives set us up for continued revenue growth and margin expansion in fiscal '21.

I'd like to end where I started, and that being the end markets. There's a lot going on in the world and there are many geopolitical worries today, but there are many things going very well in our economy, unprecedented low unemployment, strong business confidence, still very low inflation and very favorable interest rates. There are a lot of things going right in our end markets. We feel good about it, but as you heard today, we're putting a substantial laser focus on cost and cost actions at Apogee.

So with that, I thank you for your listening to me today. And I'd like to ask Andrew, our operator, to open the call up for questions. Andrew?

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Chris Moore with CJS Securities.

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Christopher Paul Moore, CJS Securities, Inc. - Senior Research Analyst [2]

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Maybe we'd just start with Framing. Obviously, most of the conversation is around EFCO. Can we just maybe talk a little bit about core Framing business? How the margins are looking there?

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James S. Porter, Apogee Enterprises, Inc. - Executive VP & CFO [3]

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Sure. Chris, this is Jim. I'll talk about it. I mean we continue to see good performance across our Framing Systems businesses. And we have some timing quarter-to-quarter but overall, our core businesses are continuing to perform well.

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Christopher Paul Moore, CJS Securities, Inc. - Senior Research Analyst [4]

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And the -- maybe could you, sort of, repeat what you had said earlier, the 100 basis point impact in Q2 Framing is related to EFCO? Or can you just go over that again quickly?

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James S. Porter, Apogee Enterprises, Inc. - Executive VP & CFO [5]

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Sure. Yes, no, so really -- what we're really trying to step up, starting in the second quarter is a real increase in some of our supply chain and purchasing opportunities across a number of our Framing Systems businesses, which is really looking at how we both optimize our supply chain from extrusions and finishing as well as do some insourcing, we've been -- frankly, through some of our productivity initiatives, we increased some capacity that's enabling us to do some insourcing where we've been purchasing some extrusion and finishing services on the outside, we'll be able to bring some of that in-house as well as we're launching on an expanding effort to drive procurement savings really across the company, which is concentrated within our Framing Systems segment. So a lot of activity. We've been working on a number of these initiatives but we're really putting our foot on the gas in the second quarter to get these going. And there's just some initial cost to get them in place.

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Christopher Paul Moore, CJS Securities, Inc. - Senior Research Analyst [6]

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Got it. That's helpful. And just in terms of the Glass market, can you talk maybe a little bit further about what you're seeing? Kind of large building versus midsized? And where the growth is coming from? What are you seeing these days?

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Joseph F. Puishys, Apogee Enterprises, Inc. - CEO, President & Director [7]

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This is Joe, Chris, I'll take this one. We're seeing consistent end markets. The term I continue to use and -- has been -- I stole from somebody many years ago and somebody stole it from me recently is that we're bumping along the top. And we're seeing good bidding and projects advancing in office, health care, education. I would say no one sector -- and multifamily housing -- no one subsector is really a standout or a laggard. It's healthy. The construction sites are full. So we tend to have these ebbs and flows that are often driven by the -- perhaps oversubscription of work at the construction site. So you'll have a couple of quarters where maybe projects don't enter the contract or the backlog as fast as you thought. But right now, I would say there's probably more work trying to manage the schedules than there is concern about the end markets. So it's consistent across the subsegments, frankly. And across the U.S.

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Christopher Paul Moore, CJS Securities, Inc. - Senior Research Analyst [8]

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Got it. Helpful. Last question from me, just in terms of the new Glass initiative, anything else that you can say on that at this point?

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Joseph F. Puishys, Apogee Enterprises, Inc. - CEO, President & Director [9]

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No. I -- not really. And I'm sorry for that. We just stuck to the financial impact for now. The project is progressing. I expect revenues to begin -- will be -- certainly begin in the second half of the year. The -- I think by the time we report on our second quarter earnings, we will actually be in production and we'll probably be able to talk about it a little bit more in 90 days. But nothing is -- everything has progressed as according to our plan when we announced it to you all 90 days or whatever it was, 65 days ago.

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Operator [10]

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And our next question comes from the line of Eric Stine with Craig-Hallum.

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Eric Andrew Stine, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [11]

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I just want to start with Glass, obviously, a very good quarter. I mean is this something where we should view a lot of the hiring challenges and some of the operational things as being in the past, that you've turned the corner there? Or are there still some things in progress and if there are, maybe an update on where all that stands?

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Joseph F. Puishys, Apogee Enterprises, Inc. - CEO, President & Director [12]

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Yes. Thanks. Eric, it's an ongoing process. We have definitely made good progress, we have enough people in place to run the business effectively. We'd like to add more, we could remove some overtime and improve our margins a little bit. The issue we had 1 year ago was, we just couldn't keep up with production demand. Now we're able to keep up with demand. Still a little bit of cost opportunity, the labor markets remain tight. It's a challenge to hire new people and particularly in the region where there -- our largest factory is. But we have the people to get the production out. We have a little more opportunity and they continue to make progress every quarter. And the first quarter was a bit of a transition. We -- don't hear us complaining about weather again but it was a challenging weather environment even in our fiscal first quarter here. Remember, our year started in March. March and April were brutal out here. So throughout the quarter, we improved productivity at our Glass business. May was the best month of the quarter. And we've come out strong in June operationally. So again, I'll end where I started, it's an ongoing process, we've got enough people, we'd like to have a few more and we continue to do some creative things to find talent.

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Eric Andrew Stine, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [13]

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Got it. Okay. That is helpful. And maybe just a follow-up on the previous question, I mean, I'm not going to ask details necessarily about the new Glass initiative. But I mean, anyway you could maybe frame in fiscal '21 you expect that to -- I believe, Jim said a contributor and potentially a significant contributor. So any way you can, kind of, frame the magnitude of that from a high level. And then is there anything different about that initiative that would change, kind of, your long-term operating margin outlook for that segment, which -- I know you shoot for 10% plus.

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Joseph F. Puishys, Apogee Enterprises, Inc. - CEO, President & Director [14]

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Yes. Eric, I'm sorry, I'll have to be a little bit careful. I don't want to start providing guidance for fiscal '21. Jim and I will be doing that obviously, at some point in -- later in this fiscal year. This project certainly bodes well for helping us with revenue at -- I think, margins directionally similar to the potential of the -- of that business today. It gives us good leveraging on our fixed, it helps us someday when perhaps there are headwinds in the end markets, we'll be happy that we made this investment. It will contribute to upside in fiscal '21 and we'll just have to hold off until we provide segment guidance later this year.

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Operator [15]

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And our next question comes from the line of Brent Thielman with D.A. Davidson.

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Brent Edward Thielman, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [16]

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Jim, do you have what the impact of the startup cost were for the first quarter? On...

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James S. Porter, Apogee Enterprises, Inc. - Executive VP & CFO [17]

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Yes. It was-- yes, so in Architectural Glass, it was about 60 basis points of impact.

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Brent Edward Thielman, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [18]

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Okay. And I'm trying to think of the puts and takes through the year. I know you're going to have, kind of, more amplified impact here in the 2Q, 3Q, should that be offset by better productivity, just given all the other things you guys have talked about, such that maybe we see sort of stable margins here over the next couple of quarters and that picks up in 4Q? Is that the way to think about it?

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James S. Porter, Apogee Enterprises, Inc. - Executive VP & CFO [19]

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I mean, it will still be a bit dilutive in Q2 and Q3. Those are going to be much heavier in terms of the impact, it'll be over 100 basis points impact in each of those quarters for this segment.

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Joseph F. Puishys, Apogee Enterprises, Inc. - CEO, President & Director [20]

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But the core business itself, Brent, as I mentioned in the prior question that Eric asked, the Glass business, the momentum on, its productivity in its traditional business we expect continued productivity improvements. That's in our guidance for the year. But the project you're asking about will be cost headwinds for a couple more quarters.

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Brent Edward Thielman, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [21]

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Got it. Okay. And then on the Services business, obviously, very robust environment. Maybe could you talk a little bit just about the terms, maybe evolution terms you're seeing on the some of these new contracts you're signing, is it a relatively tight market out there?

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Joseph F. Puishys, Apogee Enterprises, Inc. - CEO, President & Director [22]

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No. No changes in fees and terms and conditions on the projects we're working on. I mentioned, I'm most proud of that business for their disciplined approach to project selection and then project execution. It's all about getting your estimates right. I think we're the best in the industry, frankly. And you have to have -- and then, of course, you have to execute at the job site where we're doing a fab assembly glaze in our factories and at the construction site itself. Nothing changing, I would say, on the -- in the contract world and the bidding, there's healthy competition out there, we've got great competitors. But I -- we're a great competitor as well. And I think we're winning our share -- more than our fair share of projects. It's a very, very fragmented market. This is a great business for us. We're one of the bigger players and we have a fraction of the end market. So there's a lot of work to select and compete against. And I think we're seeing consistent bids on margins and terms. So sorry, nothing exciting changing on that.

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Brent Edward Thielman, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [23]

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That's okay. Maybe last question. You talked a little bit out it, Joe. I know -- I don't you don't like to blame weather. But obviously, there's some pretty tremendous things happening out in the Midwest. Is that-- is that having a material impact on the business? Or at least the customer base that you serve out there? Maybe you could just talk about that?

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Joseph F. Puishys, Apogee Enterprises, Inc. - CEO, President & Director [24]

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Nothing to call out, Brent. I -- We feel terrible for people that are impacted. Our facilities have not been impacted and when you picture the kind of work we're doing, we're not -- there's not buildings going up where we're seeing some of the devastation due to this really bizarre weather pattern hitting parts of the U.S. So as unfortunate as it is, we've been fortunate, it has not really impacted our company.

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James S. Porter, Apogee Enterprises, Inc. - Executive VP & CFO [25]

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Yes. In our smaller projects, Framing System segment, as I think everyone is aware of rain has just been a really significant issue. And it's not enough for us to call out but it's probably affected the time line of certain projects where a construction activity gets delayed and moved out a little bit, particularly in our smaller projects business. But not...

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Joseph F. Puishys, Apogee Enterprises, Inc. - CEO, President & Director [26]

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What I called out was, kind of, the severe winter weather kind of continued to provide challenges for our productivity recovery at our Glass business, Viracon, a little bit. Again, not calling it out, but it certainly -- glad that winter's behind us on -- so our Glass momentum is picking up again.

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Operator [27]

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And our next question comes from the line of Jon Braatz with Kansas City Capital.

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Jonathan Paul Braatz, Kansas City Capital Associates - Partner and Research Analyst [28]

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Joe, as the problems at EFCO become more of an item of the past, how would you view the opportunity, the potential at EFCO relative -- today, relative to your expectations originally when you acquired it? And what about the time line of realizing that potential? Can you talk a little bit about that?

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Joseph F. Puishys, Apogee Enterprises, Inc. - CEO, President & Director [29]

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Yes. We -- yes. Sure, Jon. Thanks. Yes, I -- the potential for that business is amazing. It's very -- it looks very much like what we have often called our legacy, the 3 businesses in this segment that existed when I arrived here. They do the same finishing, extrusion, window and wall production and sales, similar end markets, a little more diverse customer base, which we like. We stated this would be a double-digit operating margin business. Our starting point was lower than we thought when we did the acquisition. As we said, we're getting the problem projects out from under. Apogee has been a tremendous help to EFCO for that, they'd be the first to admit it. We put some new people in the place, both at the top, in operations, in sales, we've got a great core team that had great experience in engineering and estimating. So that business is now on its way to that double digit. I would say over the next 3 years, I certainly expect to break that barrier and I'm looking for a few hundred basis points of margin expansion every year from that business. Q1 was -- as I mentioned, they had an excellent quarter. Frankly, I was very happy with the business performance. I told the team that as they got out from under, a couple of these really problem projects that were booked just about the time of -- prior to acquisition that they would see amazing momentum and they are seeing it. And as I mentioned, we're -- that business which has been -- we took the project management and installation away from them on these particular projects we've called out, turned that over to our experts in the services. They focused on manufacturing quality units, which they've done, they're almost done. And now their full attention is working on productivity. I mentioned a nice project we approved 1 year ago. This -- tomorrow we actually start to put in -- live operation this improvement in our -- the back end of manufacturing for primarily our shipping automation. So that business will continue to drive momentum. I -- my goal is to get that above 10% over a 3-year horizon. My starting point just got pushed back 1 year or 2 from my original expectations. This -- it's a gem of a business and it fits nicely with rest of our Framing Systems segment.

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James S. Porter, Apogee Enterprises, Inc. - Executive VP & CFO [30]

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And, Jon, it's Jim. I just want to emphasize Joe's point because I think your question was spot on. We've been talking about the benefits that we see of getting this legacy project behind us. And I think a little bit in the fourth quarter and as we talked about in the first quarter, I think, getting that largely behind us has really allowed us to have the visibility of the momentum of that productivity improvements that we have been working on.

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Jonathan Paul Braatz, Kansas City Capital Associates - Partner and Research Analyst [31]

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Okay. Joe, and, Jim, I think -- I know you mentioned that -- I think you putting another $10 million -- I think it was $10 million -- into EFCO. To get to that double digit, will it require additional investment -- capital investment, do you think?

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Joseph F. Puishys, Apogee Enterprises, Inc. - CEO, President & Director [32]

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Nothing -- so, no. This was a big investment we identified before we even bought the company. Frankly, the business had identified it. This was important. The prior owners were not going to make that investment, we'd made it. Going forward, traditional tooling, perhaps some CNC investment, everything that would normally fall into our operate, maintain and productivity projects. Nothing that I would call out as a substantial investment like this one.

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James S. Porter, Apogee Enterprises, Inc. - Executive VP & CFO [33]

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Yes. And any large investments that we would see, I would anticipate them to be driven by productivity that would pay for themselves.

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Operator [34]

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And our next question comes from the line of Julio Romero from Sidoti & Company.

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Julio Alberto Romero, Sidoti & Company, LLC - Equity Analyst [35]

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Can I ask about the increased focus you're putting on procurement in the Framing business? Maybe if you can just talk about what kind of margin opportunity you see there? And if there are any similar opportunities across any of your other businesses?

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James S. Porter, Apogee Enterprises, Inc. - Executive VP & CFO [36]

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Julio, this is Jim. I'll address that. So first of all, when we acquired EFCO one of the low-hanging fruit opportunities we saw was specific to the EFCO business and leveraging similar vendors and purchases and those types things with that business, which we went after upfront. What we're doing now is redirecting and taking a broader look at the entire Framing Systems segment as well as across Apogee. And frankly, we've engaged some outside resources to really accelerate and drive focus on this effort that we think is going to really help us. And we're look at everything, we're looking at direct materials, indirect materials and, kind of, all categories of spend. Really just launching this more focused initiative, and it's too early now to really call out what we think the margin impact is. But we think there's a lot of opportunity for us as we really take a more holistic focus on driving material synergy benefits across our supply chain.

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Julio Alberto Romero, Sidoti & Company, LLC - Equity Analyst [37]

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Okay. That's helpful. And since you mentioned, you do expect improved revenue and margins in the Services business in fiscal '21, can you give us any color on maybe what the margin profile for the work there looks like for 2021? And if the project schedules can point to maybe cadence of earnings in that segment?

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Joseph F. Puishys, Apogee Enterprises, Inc. - CEO, President & Director [38]

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Yes. Let me take it first and Jim can pile on. Again I'll repeat, we're not providing guidance for fiscal '21 today. The backlog for this business kind of speaks for itself. We certainly call out the backlog in our Q, which goes out, I think, next week. It is $39 million higher than it was at the last earnings release, that was a record. I mentioned on the call today -- I choose my words carefully because I can't guarantee a backlog increase in Q2. But if orders go into contract as I expect, we will have increase in backlog in the second quarter. But I always hedge my bet on that. But it's -- the work in that business is strong so it's mostly at -- I don't think there's a significant movement in margins, it's good business, it's business that we believe we can execute well. And it'll be primarily driven by volume leveraging next year. But as far as year-over-year revenue growth guidance, we're not prepared to do that today.

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James S. Porter, Apogee Enterprises, Inc. - Executive VP & CFO [39]

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Yes. Julio, what we've commented on is, again, based on the visibility of the work that we have, with all the caveats over it, it all depends on what the timing of the actual flow is and the project execution, but from what we see today, we have visibility that fiscal '21 has the potential to perform similar to fiscal '19 for the Architectural Services segment.

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Joseph F. Puishys, Apogee Enterprises, Inc. - CEO, President & Director [40]

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Yes. And because it's such a big business for us that provides lumpiness. I wish I -- as a public company, I wish I could report that business on a 2-year basis. It -- we had an amazing fiscal '19, a record year across every metric, and yet our backlog today is stronger than it was -- at this time, preceding that record year. Okay. So you get frustrated, well, why can't F '20 be another record year? It's that -- it's just the timing of the way projects work. We're in the construction world. And I ask -- you would have a 2-year look at it as well. If it is performing well then we'll have a very, very sound fiscal '21 based on our current backlog in view of the work we're continuing to put into backlog.

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Julio Alberto Romero, Sidoti & Company, LLC - Equity Analyst [41]

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Okay. That's helpful. I certainly appreciate the color there. Just last one from me is, you amended the credit facilities to give you some better flexibility. And you also repurchased some shares, which is certainly encouraging. Can you just kind of outline what you see your capital allocation priorities are going forward?

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James S. Porter, Apogee Enterprises, Inc. - Executive VP & CFO [42]

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Sure. I mean our first priority is continuing to look at attractive investments back in the business from a capital perspective. Our dividend remains important. I think we're looking at using excess free cash flow to pay down debt, but we will continue to evaluate share repurchases. M&A is still really back burner for us as we are really focused on driving the margin improvements in our business.

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Operator [43]

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And our next question comes from the line of Bill Dezellem with Tieton Capital.

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William J. Dezellem, Tieton Capital Management, LLC - President, CIO and Chief Compliance Officer [44]

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I actually would like to follow-up on that last question to start with. The increased credit facility, is this solely for flexibility of running the business from a working capital perspective or do you have additional initiatives, not M&A, but whether it'd be something like what you're doing with Framing or something like Glass initiative that you are giving yourself extra flexibility forward that you already have some visibility that you're going to be putting these initiatives in place? Can you talk to that, please?

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Joseph F. Puishys, Apogee Enterprises, Inc. - CEO, President & Director [45]

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Bill, let me give you macro and then Jim will give you the details. Clearly, it is not to support M&A. As Jim said, that's obviously -- and I'll repeat it, it's certainly a back burner for us. It was a good time to lock in with favorable terms and reset the clock for 5 years. Who knows what will happen in the end markets? We're in a strong position to get these terms. But it wasn't for any specific need. Jim?

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James S. Porter, Apogee Enterprises, Inc. - Executive VP & CFO [46]

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Yes. So I'll just expand. I mean, it really is all driven by increased flexibility, driven by working capital and CapEx. But then in addition, in terms of -- it's got some differences in the structure build, that actually allow us over the term of this revolver to adjust the sizing of it too and with the expectation of our good cash flow generation over the next years. We even have increased flexibility relative to managing that commitment level.

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William J. Dezellem, Tieton Capital Management, LLC - President, CIO and Chief Compliance Officer [47]

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Great. And then I would like to shift to the framing initiative on the supply-chain front that you have. So I understand that it's in -- what you're doing is to improve margins longer term. I don't understand why you are having the negative impact on margins here in the second quarter? Could you talk about, kind of, the business activity that's leading to those headwinds in Q2?

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James S. Porter, Apogee Enterprises, Inc. - Executive VP & CFO [48]

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Sure. Bill, this is Jim. And I'm not going to go into too many details here. But it's really 2 things. One is, I mentioned that we're going to use some outside resources to help accelerate our focus on some purchasing initiatives and so there's going to be a little bit of upfront cost associated with that. And then as we look at rebalancing some of the operational activities, there's just really normal expenses associated with some of those activities within our businesses that'd be prepared for us.

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William J. Dezellem, Tieton Capital Management, LLC - President, CIO and Chief Compliance Officer [49]

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Okay. That sounds like one I'll take offline to understand better. And then my final question, as we look out to next year, and I recognize you don't want to provide guidance, however, I'd just like to think about the fiscal '21 conceptually. You've talked about the Service business having higher revenues and profitability next year. The Framing business will no longer have to add EFCO projects, the stage will be complete which will then give them an opportunity to assign and show [if it's] right, some above-trend revenue growth. And the new Glass initiative, will also be above-trend revenue growth. So if we put all that together, that implies that next year we should be setting ourselves up for something that is an above average level of earnings growth beyond what one would normally expect. Is there something that I am missing with this thought process?

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Joseph F. Puishys, Apogee Enterprises, Inc. - CEO, President & Director [50]

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I do not believe you're missing anything with your thought process. We -- our larger project businesses where we, kind of, have better visibility for revenue, meaning working on a large project today that will revenue next year. Services, obviously, will be a strong year. Glass, we -- what we see -- feel -- we feel that will be a solid improvement, especially, with the initiative we have. Framing Systems, mix of shorter lead time. Our focus there is cost, productivity. And our Large-Scale Optical business, I think, will continue to perform. It's small -- it'll continue to give us the cash and working capital health that it does. So -- though I don't think you said anything that I would take issue with.

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Operator [51]

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And I'm showing no further questions at this time. So with that, I'll turn the call back over to Joe Puishys for closing remarks.

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Joseph F. Puishys, Apogee Enterprises, Inc. - CEO, President & Director [52]

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All right, Andrew, thank you. All right, thanks, again, everybody, for joining us today. Certainly I appreciate your interest in my company. And I look forward to updating you on our second quarter performance and results in September. And have a great day, everybody. Take care. Thank you.

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Operator [53]

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Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. And you may all disconnect. Everyone, have a wonderful day.