Apogee Enterprises Inc (APOG) 2016 Q2 法說會逐字稿

Good day ladies and gentlemen, and welcome to the Apogee Enterprises, Inc. second-quarter FY16 earnings conference call.

(Operator Instructions)

As a reminder, this conference is being recorded. I would now like to turn the conference over to Ms. Mary Ann Jackson. Ma'am, you may begin.

Thank you, Ben. Good morning and welcome to the Apogee Enterprises FY16 second-quarter conference call on Thursday, September 17, 2015. With us on the line today are Joe Puishys, CEO, and Jim Porter, CFO. Their remarks will focus on our FY16 second-quarter and our outlook for the FY16 full year.

During the call we will discuss non-GAAP financial measures when talking about Apogee's performance. You can find definitions for these non-GAAP financial measures in our press release.

Our call also contains forward-looking statements reflecting management's expectations 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.

Joe will now give you a brief overview of the results, and then Jim will cover the financials. After they conclude, Joe and Jim will answer your questions. Joe?

Thank you, Mary Ann. Good morning everyone, and thank you for taking time to hear our story. This was an impressive quarter for Apogee. Our operating margin of 9.3% for the quarter brings our year-to-date 0M to 8.5%, certainly higher than our full-year historical high, and validates one of our midterm goals to achieve double-digit bottom-line returns. With our expected second-half performance we will achieve that goal, and believe that we will be at double-digit on the trailing 12-month basis no later than Q2 of next fiscal year. As I have said, we are already above our historical annual peak, well ahead of peak end markets.

We have now had 18 straight quarters of double-digit year-over-year operating income growth. 18 quarters, most of those in the range of 40% improvement or better. This most recent quarter is another example of that. Yet, you have already noticed that we achieved that on lower revenue growth than you likely modeled or assumed. Jim and I will get into the detail today of foreign exchange headwinds, the tight schedules at construction sites in the US, and how they are impacting revenue.

At $512 million, our books backlog is as strong as it has ever been historically. An important note that you will see today is that a higher percentage of that backlog is for work in FY17 and FY18, a great sign for our continued end market growth. I like how FY17 is already coming together right now.

Let's get into the quarter detail, and then Jim and I will take a lot of your questions. As I said, Apogee delivered another strong quarter of earnings and margin growth. Our operating income grew 45% and earnings per share of $0.50 were up 43% from adjusted earnings last year. Our gross margin improved 230 basis points to 23.6%. And our operating margin increased 260 basis points to 9.3% on improved product mix, pricing, cost, and productivity. The strong operating margin of 9.3% underscores the earning power of Apogee. As we leverage volume growth, cost management, and productivity initiatives along with our focus on project selection, we are on a path of achieving our previously stated goal of double-digit operating margins.

Our return on invested capital is now at 10.8%, up 390 basis points from prior-year period. I'm also extremely pleased with our backlog growth to a near record high of $512 million. This level of backlog supports our targeted revenue growth this year and more importantly into FY17 and FY18, since half of our backlog is scheduled to be delivered in the out years. In fact, if you compare our current backlog to the same time one year ago, we have $60 million more booked for the future years. I'd like to remind you, as Jim always does, that our backlog quarter to quarter is lumpy and our ability to grow is not dependent on quarterly sequential backlog growth. We make this comment even after very strong backlog quarters like the one just ended.

Our revenue growth was 4%, but let's peel back the onion on this. As noted in our press release we are driving and achieving strong double-digit 15% growth in all of our US products businesses, both Large-Scale Optical and Architectural with our quality products and differentiated service levels. Impacting our growth were several factors related to our international businesses, foreign exchange rates, the slow economies in Brazil and Canada and the strength of the US dollars which provide headwinds to international Architectural Glass sales.

In addition, revenue growth was impacted by project timing in our Architectural Services installation business. We had projected lower growth for the install business as we focus on margin improvement, and continue to expect full-year mid-single-digit growth, as planned for the Architectural Services segment. Before you ask, let me highlight that while this business was down $7 million year over year in sales, it added over $40 million of higher margin bookings into backlog. Our growth will come in the second half.

We continue to be focused on investing in businesses to improve productivity and competitiveness, as well as to extend product lines and penetrate new domestic geographies. Looking at the segments, we achieved top and bottom-line growth in our products businesses. Architectural Glass grew 10%, 14% in constant currency. The glass segment operating income doubled, and operating margin grew 340 basis points to 7.3%.

Our Framing Systems business, revenues were up 5%, 9% in constant currency. The Framing Systems operating margin was also up triple digits, 230 basis points to a strong 12% operating margin, even with the Canadian headwinds. Our US businesses are driving this excellent margin through strong operating performance, share gains, and new product introductions that deliver further high margin growth. We've also made a $17 million capacity investment in our finishing business that is ready to come online at the end of this month. At the same time we are leveraging the success of our US storefront business to drive improvements in our Canadian business unit.

The Large-Scale Optical segment revenues were up 16% on strong sales of value-added picture framing product. We continue to see the US custom framing market upgrading to our highest value-added products in that segment. The segment operating margin grew 360 basis points (sic - see Press Release "370 basis points") to 25.1%.

Although Architectural Services revenues and operating margin declined year on year, their operating margins expanded sequentially by 100 basis points on lower level from the prior quarter. Our Services segment is executing to their plan with a focus on margin improvement rather than growth. Their careful selection of projects is evidenced by a couple hundred basis point improvement in margin in the work going into our backlog.

Now, let me look at the -- take you to that fiscal forecast for 2016 for the full year. We continue to expect a strong 2016 for Apogee with revenues of $1 billion and operating margins approaching double digits as we close the year. In fact, year-to-date operating margin is 8.5%, which is 20 basis points higher than Apogee's historical peak annual operating margin. And we expect the second-half margin to exceed 10%. Construction site delays are shifting some work from 2016 to 2017, causing us to revive our revenue outlook to high single digits from the 10% to 15% in prior guidance. We are maintaining our earnings per share outlook of $2.10 to $2.25 based on the strong operating performance we've shown to date.

Our guidance takes into account the expected impact of project timing and construction site delays. Growth could be plus or minus, depending on actual experience based on the customers' timing themselves. Bidding activity remains very robust, as evidenced by our near-record backlog with half the work scheduled for 2017 and beyond -- fiscal years that is. Our high level of backlog combined with commitments, bidding activity, award activity position Apogee for continued growth.

We remain confident in our longer-term outlook for revenues of $1.3 billion at 12% operating margin in FY18. I'm pleased that our strategies to grow through new geographies, new products and new markets along with great focus on project selection and productivity and operational improvements are delivering phenomenal results. Jim will now take you through some of the details in the financials. Jim?

Thanks, Joe. I'm also very happy with our operating and earnings performance in the second quarter. Operating income grew 45% to $22.4 million, and our operating margin of 9.3% improved by 260 basis points year on year and 160 basis points sequentially. Our earnings of $0.50 per share were up 43% from the prior-year period adjusted earnings per share of $0.35. As a reminder, in last year's second quarter we reported earnings per share of $0.57 which included recognition of $0.22 per share for the tax credit that we earned with completion of a major investment in our Architectural Glass business. Our reference to adjusted earnings per share excludes that.

Second-quarter revenues were up 4% to $240.8 million, somewhat impacted, as Joe explained, by project timing in our installation business, as well as foreign exchange and weak foreign markets for our Canadian and Brazilian operations. The foreign exchange impact on revenues from our operations in Canada and Brazil held down growth for Apogee overall by 230 basis points, while the impact on earnings was immaterial in the quarter. In discussing the second-quarter revenues, we've also pointed out that we had double-digit top-line growth in the quarter for our US products businesses. This reference excludes revenues from Architectural Services, the Architectural Glass operations in Brazil, and the Framing Systems storefront business in Canada.

I simply want to point out our continued solid growth in our targeted growth sectors. We achieved a strong gross margin of 23.6% for the quarter, up 230 basis points compared to the prior year and up 40 basis points sequentially. Compared to last year we benefited from volume leverage, increased pricing, improved productivity, and a favorable product mix in our businesses, along with lower healthcare costs.

I'd like to add some color to the quarterly segment results. In Architectural Glass, revenues were up double digits and operating income doubled with improved volume, pricing and mix, as well as productivity in our US operations. As we had projected in our outlook last quarter, both the top and bottom line declined sequentially due to customer scheduled project timing.

In the second quarter the Architectural Services revenues and operating income declined year on year, largely as expected, due to project timing as we have explained. Sequentially the margin improved on lower revenues, showing the progress we are making in improving job profitability. As Joe said, we continue to have increased margins on new projects going into backlog. And for the full year we continue to expect that we'll have revenue growth and margin expansion for this segment.

The Architectural Framing Systems segment grew operating margins to 12% on 5% revenue growth. Our US businesses are growing and leveraging volume with increases in pricing, mix, and productivity. Canada continues to be impacted by foreign exchange and the economy, and we're working to improve operations in this challenging environment.

The Large-Scale Optical segment achieved double-digit growth with strong sales of value-added picture framing products. We had a little easier comp to last year based on customer order patterns that were a bit softer than last year's second quarter relative to the year. This year we're also seeing some growth in new products and new markets. This year our improved product mix along with strong productivity led to higher operating margin.

Our second quarter average capacity utilization across all Architectural manufacturing businesses was again approximately 80% compared to approximately 80% in the first quarter and about 75% in the prior-year period. Our second-quarter backlog was up $41 million from the first quarter to $511.9 million. The largest portion of our backlog is in our services business where we are purposefully tempering growth. The balance of our backlog turns a bit more quickly so we can deliver revenue growth without requiring the sequential growth in backlog. That leads to my quarterly reminder that our business does have the lumpy order intake activity, and so we don't require or necessarily expect that sequential backlog growth each quarter to be consistent with the longer-term trend and our expectations for top-line growth.

Our backlog mix at the end of the second quarter continues to reflect the strength in the office sector, with a slight shift from institutional to office backlog in the quarter. The office sector increase to a range of 55% to 60% of our backlog, up from approximately 55%. The institutional sector is 25% to 30% of the backlog compared to about 30% last quarter, and healthcare projects continue to be the majority of this sector. Multi-family residential, including high-end condos and apartments, was approximately 5% to 10% of backlog. And the all other, hotel, entertainment, transportation was 5% to 10% of the backlog. Regarding the timing of backlog, approximately $256 million, or 50% of our backlog, is expected to be delivered in FY16 and approximately $256 million, or 50%, in FY17 and beyond. This timing bodes well for continued growth in FY17 and FY18.

In the quarter we generated positive free cash flow of $31 million, nearly 3 times the $11 million in the prior-year period. This improvement demonstrates Apogee's cash generation potential. Our non-cash working capital was $77.1 million compared to $97.5 million at the end of FY15. We continue to have strong days working capital management, with our days working capital improved 3 days over a year ago to 47 days in the second quarter. The tax rate for the quarter was 34.2% versus 34.0% in the prior-year period on a comparable basis. Including last year's $0.22 per share tax credit we had a negative tax rate in last year's second quarter.

I'll turn to our outlook. Our outlook for FY16 continues to put Apogee in a position to deliver record revenue and earnings results. Because construction site delays are shifting some work from our FY16 into FY17, we've revised our revenue outlook to high single digit growth from the previous guidance of 10% to 15% growth. We are maintaining our earnings per share guidance of a range of $2.10 to $2.25 per share.

Regarding the timing of revenues for the second half of this year, based on the current project schedules from our customers we expect that the fourth quarter will be the strongest overall. At the segment level, we expect the fourth quarter will be better than the third quarter in Architectural Glass and Architectural Services based on anticipated project timing while the third quarter will be seasonally stronger for Architectural Framing and Large-Scale Optical. Overall we do see tougher comps for the second half of the year compared to a strong second half in FY15.

We do expect that FY16 full-year growth rates will vary by segment. We anticipate that Architectural Glass will grow in the low double digits, with mid double-digit US growth held back by weak Brazil market conditions. Architectural Framing Systems is expected to have mid-single-digit growth, with solid US growth tempered by the slower Canadian business. Architectural Services is expected to have mid-single-digit growth in FY16. And for the Large-Scale Optical segment, we expect to see low to mid-single-digit growth.

We expect full-year operating margin to approach 9.5% for the year. This is in line with our expectations to deliver a trailing 12-month 10% operating margin in the first half of FY17. For full year FY16 we expect depreciation and amortization of $33 million. We obviously expect strong free cash flow for the full year in FY16.

Relative to our cash flow generation, our priorities for use of cash continue to be investing back into the businesses for capabilities, productivity, and capacity, and M&A, as well as maintaining our dividend. We're actively evaluating opportunities in each of these to continue to pursue our strategic goals and increase shareholder value. We anticipate our FY16 tax rate will be 34%.

I feel really good about our results year to date and the performance trends that we see in our businesses. We expect a FY16 with solid revenue growth and margin contribution, nice cash generation, delivering record results for Apogee. And with our outlook of strong end markets, and the strategies we have in place, we also continue to believe we are positioned to deliver the longer-term goals we've outlined. Joe?

Thanks, Jim. As you've seen, we've held our guidance for earnings performance on slightly lower revenues. The currency conversion issues from our foreign operations will likely continue into next year, but as Jim noted, this is more of a top-line optic than a bottom-line, though it doesn't help. The strength of the US dollar is making export business a challenge for all US manufacturers, and we are no exception. But we are not simply hoping that the issue will abate. We are investing heavily in our operations to improve our competitive position, and we're just beginning. We plan to continue to make significant investments in our manufacturing cost structure.

The fact that construction sites across the US are very robust is a strong indicator for the end market growth, and it still has a lot of steam. The impact of delays at sites, while an impact on timing this year, bodes well for our FY17 plan. We have absorbed these headwinds and maintain our 50% income growth this year. As I said, I like our position for the next three-plus years and look forward to delivering $1.3 billion top-line and 12%-plus bottom-line as our next short-term milestone.

With that, I'd like to take your questions. Ben, if you could open up the call to our participants to ask questions. Thank you.

(Operator Instructions)

Samuel Eisner, Goldman Sachs.

Yes. Good morning, everyone.

Hey, Sam.

Good morning.

With regards to the timing issue, wanted to dive into that a bit further. It seems across the board that the overall Architecture revenue, Glass Framing and Services were a bit lower than we were expecting. So want to really to dive into this construction timing. How is it being pushed out, what are you guys seeing on the ground, what are your customers saying to you? Is it something about products getting to the site? Is it your products getting to the site? Is it other than -- in the chain of building the buildings? Just want to understand that more completely.

Yes. So thank you, Sam. First off, there are no -- we have not seen a single project cancellation or actual start of a project. We're talking about projects underway. I think we saw, when the economy in our segment and our sector came roaring back last year, we saw a plethora of orders come through. We saw glass lead times across our industry, including ourselves, sky-rocket. I think the phenomena is a lot of construction sites put together aggressive schedules. As the reality set in, they maybe on the 30th floor instead of the 40th where they thought they'd be. It pushes back everything.

Our deliveries are fine. Our lead times are as low as they've ever been, as fast as they've ever been in both glass and in our installation side, but there's no question the construction sites across the US our full. So when there's a delay at a site and the glass isn't needed for a month, or the installation is behind by a month, there is nowhere to go get that short-term order, just because everyone is busy right now. So it's certainly showing itself in our significantly improved margins in our installation business, our performance in the glass business. It's still up 14% in constant currency, Sam. It should of been higher. We probably had $5 million slip out of the quarter. We'll have more than that slip out of the year. But we were able to maintain very, very strong operating performance on that.

So there's not been a single project cancellation, just the opposite. We are seeing very robust activity. It's just like a traffic -- the highway on the traffic is full right now, and any time there's an issue, it just backs everything up for miles. And -- but I can assure you, we have not had a single issue with delivery of glass or services on project site.

And to the point of that bottleneck, is it the fact that there are not enough -- there's not enough labor in order to move to the 40th floor in your example? I mean, what is that 10-floor delta that you were talking about? I mean, I guess, what is the main driver behind this delay? Is it just that there's not enough people in order to get the products into the building? Is it a supplier issue? Just want to understand that more completely.

Well, it's mostly over aggressive schedules from the contractors and owners, frankly. People are impatient. I think the recession and the malaise in our end markets were long and drawn out. I think you guys heard me use words like two years ago, we're no longer hearing about double-dip where the ice is starting to harden, but it still -- there's too much tentative nature out there. People were slow to pull the trigger. And finally last year, about a year ago, and I remind people in spite of our 1100 basis point improvement in margin the last four years, last year was the first year we got the benefit of end market growth. But when it came, it came so aggressively that everybody tried to get to the front of the line, and I think over-aggressive schedule is the number one issue.

Labor. I wouldn't call labor shortages, but clearly you could -- you read the unemployment numbers for the United States, and in certain segments it's below 5%. And I would say labor is a secondary issue at sites. But it's mostly over-aggressive schedules we're dealing with.

That's very helpful. And then just on the gross margin drivers on a year-on-year basis. I was curious if you could parse out -- I know Jim, you ran through a few of those different components, but perhaps you could weight them? Are they each 25% of the gross margin expansion? Are any of them the lion's share of that gross margin expansion? If you can comment on that, that would be wonderful.

Sure, Sam. I mean, I did go through the list. And I think, first of all, they're in order, but there really isn't one element, because some of them vary a little bit business by business, and you kind of see the highlights within the segment sector. But let's take a quick look at it here. But I think, it really was in order of, as I articulated it, volume, pricing, productivity and product mix. And as I said, there really wasn't one factor that was materially different than the others. It was the combination of those.

And if I can just sneak one more in, just on capital allocation. Perhaps you can talk a bit about the investments needed for this cycle in order to hit the guidance range, or at least the goal that you guys have given for FY18. What additional investments will need to be made in order to get that? And then how do you think overall about that, your growing cash balance?

Yes, thanks, Jim. Joe again. We've made, I believe, safe to say we've made the majority of the capacity investments we have to make. We added capabilities at our glass business, our largest business, with the installation of the new coder last year. I mentioned in my comments the capacity increase we've made in our finishing business, which has been a phenomenal performer within our Framing Systems segment. We've done improvements in our Canadian operations, including capacity.

Our primary focus for the next few years is on productivity. I want to have a significantly better cost structure. I believe from peak to peak and trough to trough we can be anywhere from 500 to 1000 basis points better than we've been in the past. We need to have a better cost structure to achieve that. We're on our way. Most of our investments now will be around productivity.

I expect to continue to spend more CapEx than D&A for the next couple of years because the paybacks are really phenomenal, and they are geared to make us more competitive when the eventual down cycle happens. Right now that's in the future, but we are doing a lot of planning for the what might be five years out from now. And so I would say the focus is productivity and project selection, as I said.

Great. Thanks very much. I'll hop back in queue.

Yes. Thanks, Ben.

Brent Thielman, DA Davidson.

Good morning, Joe and Jim.

Good morning, Brent.

In terms of the international business, Canada and Brazil, I got the numbers as of the end of last year. What are they now in terms of percentage of revenue?

Yes. Thankfully I'll let Jim give you the detailed answer. Thankfully they're a relatively small percent of our business. We're actually performing well, but there's no question they are a drag. The currency movement on the Canadian dollar from just one year ago is, depending on whether use the Canadian dollar, the US dollar as the basis of your denominator, roughly 20% change in a year. And in Brazil, it's about 50%.

So even though it's less than 10%, the Brazilian business is less than 10% of the overall Glass segment, the market's crappy right now. You all know that. We are still operating in the black. It's not where we would've hoped for three years ago because the economy is down and the exchange rate is really impactful. So even though it's less than 10% of our Glass business, it impacted a 4% impact on the reported revenue growth of 10% versus 14% in constant currency.

And so, Brent, just in terms of the percentage of our total revenues of international, which is both in our Canadian/Brazil operations as well as our exports out of North America, we'll probably be this year in the neighborhood of about 8% of revenues, and that's down probably 2 to 3 points from last year.

Great. Thanks for that. And in terms of the site delays, the ways -- thanks for previous response. But does weather kind of factor into that as well in terms of what we've seen this year in sort of getting these projects in for the process where they need your products?

Yes, Brent. I've seen some other quarterly reports come out and attribute some softness to the weather. We can't blame weather. We really didn't see any affect on weather in the quarter for any of our businesses. We've had experiences in the past, and particularly our first winter with Canada, but this year is not an issue. It's noise.

But I would repeat, a lot of our -- we'd be -- as we mentioned, we're 15% top-line growth in the quarter in spite -- as reported, in spite of the currency issues in our products businesses, but our installation business was down significantly in the quarter. Most of it was planned. There was some delays, but most of that was planned.

For the full year, we are maintaining our guidance that we will grow in the mid-single digits in that segment, which means stronger growth in the second half. And the bulk of our backlog increase, I mentioned over $40 million of our backlog, came from the services business. A lot of that is in the future years, but they also have a lot of work to revenue, and our sequential growth in revenue in our services business will be significant, as planned. So long way around the barn, but weather did not impact our results.

Okay. And then, glass prices, obviously, gotten a little publicity here as of late. Can you remind us how that impacts you in the short run and how you guys are responding in the marketplace in terms of what you're seeing there?

Yes. We, like everyone, we pass along this price increases. We have forward buy commitments. We actually have, in spite of the glass capacity constraints, we are well supplied out, well into the future. We price accordingly, based on the increases. Typically in our industry you get leverage if glass prices go up, you typically get strong leverage on that increase. So it is certainly not hurt us. We had great visibility. We are one of the largest glass fabricators in the world. We have correspondingly terrific relationships with all of our suppliers. And we are able to pass that on in the form of project pricing.

Okay. Great. And one more if I could, just on LSO. Jim you mentioned, you had a little easier comp, but 16% growth is still pretty strong. Can you talk about maybe some other specific drivers of that growth, and what trends could kind of carry into future quarters that might benefit your growth rates in second half for that business?

Yes, Brent. So definitely there was a factor of comps because as you know, a year ago, just to remind you, we had the issue which is retailers were placing their holiday purchase orders later than normal. And so it kind of drove our second quarter down a little bit. But, so that factored in. But really the primary driver is just we continue to move the end market up to higher value-added products, and that's both from the commodity clear glass products into base value-added.

But more importantly, as we continue to move the products, just every step up into higher and higher value-added products, it's obviously, a better pricing and better margins associated with it. And then while it's a small piece of the business, you've heard us talking a lot over the past several quarters about new products and new initiatives. And we are seeing some nice growth, even though it's a small part of the business in, whether it be the fine art and museum category, or in what we're calling engineered optics, which is looking for, for example, electronic display applications or different applications like that. And that a real important focus for us long term in this segment, is to continue to deliver new products and drive growth in those new markets.

Okay. Thank you.

Thanks, Brent.

(Operator Instructions)

Jon Braatz, Kansas City Capital.

Good morning, everyone.

Hey, Jon. Good morning.

Joe, you spoke about how strong your markets are, increasing backlog and so on. Can you talk a little bit about the prospects or the ability to raise prices at all in view of the strong markets? Is there any way you can take some additional price?

Well, we have been. When you read our results and you listen to the transcript again, as Jim mentioned earlier, we do, as he reports, the drivers to gross margin; and I'm very proud of where we've gotten our gross margin to, by the way. We had pretty good results last year and we're up 230 basis points on the gross line. We list them in the order of impact. So you can see pricing is right up there with -- after volume. We are getting good pricing in all of our business. Some of it comes from introducing new products at higher margins, more value-added products.

Our end markets are so robust now that there's no question there are pricing opportunities in our industry. It's the nature of the beast, and we try to take advantage of the conditions and price competitively. Yet, we need to get paid for the complexity we deliver. I don't think in the past Apogee got paid for the complexity it delivered. And I believe we're much better at it now and we put a level of pricing excellence into place to try to drive performance so that we do get paid for what we are doing. And so, again I'm long-winded, but I would say, yes, the end markets are conducive to continued positive pricing.

Is there any way you, as we look out and towards next year, you might be able to put a number on what prices, what you think you could get in additional prices?

Yes. John, I don't want to start projecting price increases for next year. I think that would be inappropriate.

Again, I would leave it at our two largest businesses. Glass, we typically are able to pass on price increases and then drive conversion to stronger mix through our influence with architects who love us and we love them. And in our Projects business, it's kind of hard to talk about price. You're talking about something, a project that doesn't compare to anything you've done before.

But I can tell you, better selection, and we are doing it. Our Services business, the margins in backlog are up triple digit basis points versus a year ago. And we continue to see improvements every quarter. I really like the selection process we have going forward. And that may not be calculated as price on a piece of paper but for all [intents and purposes], it's price.

Okay. Thanks. And then lastly, on the LSO business I know you initiated some new programs in Europe. You've talked about them in the past. Are you seeing any traction in that business over in Europe?

Yes. Surprisingly, the exchange rate with the euro and the dollar is -- certainly not helped us. We have a US cost basis and the euro movement has also been about 20% in the last year. We protected that business with some financial stuff we do; hedging. We've got great delivery. We continue to see growth over there, especially in our fine art market. Again, it was a small business, but it's gone from nothing to several million dollars. And the team continues to do well. So we've avoided any significant impact on the exchange rate with the euro headwinds. It's -- our folks have beat that down.

Okay. Great. All right, Joe. Thank you very much. Appreciate it.

Thanks a lot, John.

Brent Thielman, DA Davidson.

Thanks, guys. In terms of the guidance, it looks like through a $30 million to $70 million is kind of coming out of revenue guidance this year, depending on what end of the range you use for the previous guidance range. I guess what have you seen change that gives you the confidence your margins will make up for that and allow you to hit that EPS range? Is it basically what you've put in backlog that's got better margins than anticipated?

Yes, it is what's in margin. I would say, I highlight a 50 to 100 basis point margin improvement each year due to our lean and operational excellence initiatives. We are doing better than that this year. I've said it repeatedly. When we were -- when you grow 20%, it's not easy to have really strong conversion because your operations are stressed. You have overtime. You've got new shifts, you've got new supervisors, you've got new employees. When you grow 10%, 12%, in that range, it gets easier, and we should deliver better conversion.

We delivered 80% conversion incremental profit on the incremental revenue to the business which was why our total Apogee margins improved 230 at gross and 260 at the bottom line. And you saw the product segments all grew margin by 230, 340, and 360 respectively framing, glass, and LSO. It's because of the operational performance and our ability to maintain and control our costs with reasonable revenue growth.

I think you're right about the amount of revenue. That range is accurate. That kind of pushed into next year. And you're seeing it in our -- Jim gave the breakdown of backlog. I use the number of $60 million. If you compare this year's backlog with last year's, and I said, how much of it was not for current year consumption, it's $60 million more. And last year, we had phenomenal backlog increase in the second quarter. So, in spite of a very challenging comp from backlog growth, we did it again and we go into next year with a lot of revenue tailwinds from what's in backlog at better margins.

Brent, I'll just add two additional points. One is over the last couple of years, you've heard us make a lot of comments about how we're trying to position Apogee differently to operate throughout a cycle. And one of the things that we've talked about is being more nimble and variabilizing our cost wherever possible. And so frankly, as we did see -- one of the benefits of the long lead time business, as we did see some of these projects delay out of FY16, we did react in, from a cost management standpoint, in terms of really whether it be delay in headcount additions, adjusting our shift schedule and those types of things, and that's factored into our outlook for the rest of the year. And Joe talked about our improvements with productivity.

But then also the other difference has been the maintenance of lower aluminum input costs that we're projecting for the rest of the year relative to what our outlook was previously. As the overall end markets have changed, we continue to see and expect, while some increases, lower aluminum cost than previously.

Okay. Thanks, guys.

Thanks, Brent.

Scott Blumenthal, Emerald Advisers.

Thank you for taking my questions.

Sure, Scott.

Jim, could you repeat the free cash flow number that you gave us?

For the quarter, is about $31 million.

Okay. Thank you.

Welcome.

And Joe, with a bit slower revenue guidance here and no change in EPS, obviously signaling a little bit better margin, you did mention that you are expecting meaningful improvement in services. Should we expect most, if not all of that margin improvement to come from improvement in services, or should we get a little bit of that from somewhere else?

I think it will come across the board. We -- I think we'll see strong revenue growth sequentially from services, just because of the timing. I feared that the Street would overcook the results from services. We're very transparent here, so you got to hear what we say. We don't hedge the -- the business did pretty much what we expect and was built into our plan. I can't control what other people think we're going to do, but we'll see definitely some uptick in that. But all of our businesses should continue to deliver strong revenues, our Outlook has accounted for that.

Jim mentioned, I mean, with some of the currency headwinds, which just currency alone, just forget about the end markets in Canada and in Brazil, 230 basis points of growth, but that didn't really impact profit that much. So, sure, it brought our top line number down a little bit, but it had de minimis impact on our income, so it certainly helps us maintain our number. But that -- we were able then to offset, and we absorbed all of these issues in our bottom line results through pricing, really great leveraging on the volume we did have; and we did have high volumes, as I said, 15% in our products businesses in the United States was pretty phenomenal.

Okay. And Joe, with regard to the services business, understanding that we are not going to get there, or shouldn't expect to get there in Q3 and Q4, what do you ultimately -- what's your ultimate expectation for margins and where they can get in that business?

Yes. And I'm not saying, Scott, that we can't get there. We continue to hold our forecast for top line in that business, and expect solid conversion. If you look at that business, it had roughly about a 10%, if you compare quarter to quarter, about a 10% deconversion, or meaning the incrementals only went down 10% on the revenue drop. That's really solid performance for that business. And I expect it to perform admirably what we start to show revenue growth in the second half. My expectations are that business, which will always be lower margin, it's a very high ROI business.

Right.

Won't be -- it will be the lower end of the seven businesses we have, the four segments, below 10%, but it should be knocking on the door of 10%. It's not there yet. But with the projects we're booking today, I'm very confident it will do what it said. In my comments, we're very clear. That business is executing to the plan we approved for it this year. And so I'm pretty happy with it.

Yes. Understood, and thank you for that. Can you make a comment about the contribution that you got from your St. George location during the quarter? I remember that was a little bit of a drag last quarter. Maybe talk about how that's operating and maybe a little bit of a comparison of the contributions quarter over quarter?

Scott, it's Jim. I don't have the specifics. I think last quarter it was a drag in the beginning of the quarter. It was positive contributor by the end of the quarter, and fairly neutral for a full-quarter perspective.

Yes.

And this quarter, it's executing well and it's profitable. We want to be a little careful about talking about profitability by plant because we schedule production based on the scheduling where the projects are, and so we kind of move activity from one plant to another. But in the end of the day, we've got a little bit of a positive contribution from our Utah facility compared to a year ago when it was closed and we were incurring depreciation costs associated with that.

Yes. Understood. And one more, if I may, Jim, since I got you here. There was a comment that about $5 million slipped out of the quarter. Should we expect about the same amount each quarter through the rest of the year here? Or do you expect that to maybe taper a little bit?

Well, the way I'll answer it is that I tried to give some direction, both in terms of the quarterly outlook by segment as well as the full-year growth by segment, and that takes into account what we've already seen and what we expect relative to that kind of shipment. The short answer to your question is, our overall guidance for the year does reflect quarter-by-quarter movement, some of which moved out to the latter part of this fiscal year and some into next fiscal year.

Okay. And with regard to having to delay glass shipments on some projects, do you get paid for storing that stuff? Obviously, you can't send it out there onsite until it's ready to be installed. So that provides a little bit of an issue for you with regard to having to move that stuff around, or at least keep it around for a while. Is that something you get paid for?

Yes. Our terms and conditions certainly allow us to be compensated if we have to store glass.

Okay. Terrific. Thank you.

Thank you, Scott.

I'm showing no additional questions. I'd like to turn the conference back over to Mr. Joe Puishys for any closing remarks.

Okay, Ben, thank you. And everybody, thanks for taking the time to hear our story. Great to see the enthusiasm and the questions. Hopefully our explanations today help you put some meat on the bones of a one-page earnings release. And hopefully you feel better about the explanations [site]. I'd like to repeat, we are now halfway through the year at knocking on the door at 9% operating margin. You heard Jim mention our full-year expectation is 9.5%, which is up from our prior quarterly reports. Obviously, you can do the math. The second half of the year will exceed 10%.

We are in areas we've never performed this well before at Apogee. So we're exceeding historical peaks. And we are, as I mentioned, far from historical peak end market conditions. Feel there's a lot of steam left in the end markets and will continue to take advantage of that. I look forward to similar results in the third quarter. And we'll look forward to talking to you all then. And in the meantime, have a great day everybody. Thank you.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program, and you may now disconnect. Have a great rest of your day.