Apogee Enterprises Inc (APOG) 2018 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Apogee Enterprises First Quarter 2018 Earnings Conference Call. (Operator Instructions) As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Ms. Mary Ann Jackson. Ma'am, you may begin.

Thanks, Kaylee. Good morning, and welcome to the Apogee Enterprises Fiscal 2018 First Quarter Conference Call on Thursday, June 22, 2017. With us on the line today are Joe Puishys, CEO; and Jim Porter, CFO. Their remarks will focus on our fiscal 2018 first quarter results and our outlook for fiscal 2018 full year.

This quarter, we've added slides to supplement the information we're providing in our conference call remarks. These slides can be downloaded from our website. The PDF is located adjacent to the website link.

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. We called out adjusted earnings related to our recent acquisitions in our first quarter release and have included the tables reconciling non-GAAP financial measures in this 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 the 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 Jim will cover the financials. After they conclude, Joe and Jim will answer your questions. Joe?

Thank you. Good morning, and welcome to Apogee's Earnings Conference Call.

Before I proceed with my usual business update, let me gain altitude for a moment. This release will require significant explanation, and Jim and I will do just that, painstakingly so, if needed. Let me be clear and concise, we maintained guidance that we provided 90 days ago before adding EFCO-related cost and EFCO profits. You will hear us discuss adjusted earnings today. The only items in our adjustments are deal-closing costs and amortization of short-lived intangibles from the Sotawall and EFCO acquisitions. We do not include business issues nor performance issues in our adjustments, though I will refer to such items to allow you clarity on expectations going forward. I also note, we do not adjust for the $0.11 of interest headwinds associated with the borrowings to execute the EFCO deal.

So let's talk about the quarter. Q1 was a good quarter with performance largely as planned. We had costs related to M&A, as we had anticipated, and no question, we're experiencing revenue headwinds from our Services business. But clearly, this is timing as evidenced by $100 million backlog growth in the last 2 quarters. Our Framing Systems segment did experience some unplanned cost, aluminum and manufacturing cost. Our aluminum price increases are now fully introduced to the market, more than offsetting the cost headwinds, and our factories were performing as expected before the end of the quarter. Our markets continue to be very positive for our business. Our end markets are quite strong, if not stronger than 90 days ago. Bidding activity, employment ads across the U.S., lowered vacancy rate, increased architect billings, all moving in the right direction. In fact, most of you should've read that May's Architectural Billing Index came in at a very solid 53 in the month of May, right where we want it.

At the same time, in the first quarter, we continue to reposition Apogee to deliver more stable future revenues and growth. Significant achievements around my "It's not your father's Apogee" strategy include the EFCO acquisitions that was announced in the quarter and completed early in the second quarter as well as the new oversized glass capability and productivity related to automation brought online in our Architectural Glass business. We are very excited to bring EFCO into the Apogee family. The acquisition of a growing and profitable business with more than $250 million in annual revenues, a backlog of more than $200 million stretching into fiscal 2020 and significant operating margin improvement potential, all accelerating Apogee's growth and profitability strategies. EFCO also contributes to smoothing revenues regardless of the economic conditions as it expands Apogee's presence in the midsized commercial buildings, broadens our product offerings and increases our geographic presence across the United States.

We are already pursuing synergy opportunities, and we feel they are significant, given that EFCO operates in the space we know very well and structurally has similar operations to those across Apogee. Our initial estimate is that we can generate synergies of between $10 million and $15 million annually by fiscal 2020 as we leverage operational best practices, including productivity, lean, supply chain, and also implement initiatives already identified by the EFCO management team. Speaking thereof, EFCO has a top-notch management team that is staying with the company to lead in reaching its potential and contributing to the success of Apogee in years to come. EFCO has an experienced and dedicated workforce that is excited to be part of a company totally focused on nonresidential construction markets. We funded the EFCO acquisition through the expansion of our existing credit facility, raised from $175 million to $335 million in early June.

I should also note that the integration of Sotawall acquired in December of 2016 is proceeding extremely well. It's another very well-run business. It's very profitable and has been winning significant new business since joining Apogee. We believe we've acquired 2 winners to contribute to a stronger Apogee moving forward.

Turning to the first quarter. Our revenues grew 10%, and adjusted earnings per share were up 2% compared to fiscal 2017. We've added adjusted earnings and operating margins to our reporting moving forward to show actual performance, excluding the impact of transaction-related charges and amortization of short-lived acquired intangibles related to the acquisitions of Sotawall and EFCO. Jim will cover these impacts on our consolidated first quarter results in our Framing Systems segment results and our full year guidance for 2018 shortly. Two of our 4 segments grew revenues and operating income in the quarter compared to prior year: Architectural Glass, primarily and particularly in the midsized U.S. projects; and Architectural Framing Systems, where existing businesses grew revenues and we benefited from the addition of a full quarter of Sotawall revenues and profits.

That said, first quarter results were impacted by factors I noted in my opening remarks. We had guided to lower first half revenues in Architectural Services segment due to project timing. We're looking for a strong fiscal 2019 in our Services segment and beyond as we continue to build backlog. We added almost another $40 million in the first quarter, and I expect that our Services segment backlog will again grow in our second quarter. And this all follows a particularly strong fourth quarter in the backlog metric for Services, as you know. In addition, we incurred planned start-up cost of $1 million for our new Architectural Glass oversight capabilities, which are now up and running. We delivered our first oversized unit late in the quarter, and we look forward to additional revenues and margins and productivity benefits associated with this major investment. Our Architectural Framing Systems segment was impacted by higher aluminum costs until price increases took hold midway through the quarter, and 2 of our segment businesses incurred higher manufacturing costs in the quarter, which were corrected before the quarter ended. Our Large-Scale Optical revenues and operating income were down on the timing of customer orders. This remains a gem of a business with strong operational performance, strong operating margins and great customer relationships.

I am pleased with the significant progress we've made in the last 6 months in our journey to deliver consistently solid performance year in and year out. Our recent acquisitions contribute to geographic expansion in the Northeast U.S. and Canada with Sotawall, the West and Southeast with EFCO and these companies also add to our product portfolio and come with class A management teams and strong backlogs. EFCO also brings broader penetration in the midsized and smaller projects, and our Architectural Glass a business continues to expand its presence in the midsized building projects. Our retrofit growth strategy continues to deliver year-over-year growth, and we add resources to the sales effort. And our new product introduction effort, as measured by our vitality index, continue to be an enabler for us to grow beyond our end markets. We're driving diversified growth plans, all while investing in new capabilities, such as the oversized glass and investing in factory automation.

Looking at our outlook for fiscal 2018. With the addition of EFCO and Sotawall, we'll be approximately $1.4 billion in revenues this year, quite a step-up from just surpassing $1 billion in revenue for the first time in our history last year. For the full year, we're now expecting revenue growth of 26% to 28% and adjusted earnings per share of $3.65 to $3.85. We anticipate an adjusted operating margin of 11.5% to 12%, up slightly from last year as we had EFCO revenues at mid-single-digit operating margins. Our end markets remain strong. And based on our visibility from our businesses and external metrics, we have gained great confidence in fiscal '18 and beyond. We'll accelerate our growth strategies this year with the addition of Sotawall and EFCO while we continue to position Apogee for more stable performance throughout any economic cycle.

Jim, if you could cover the financials now, please?

Thanks, Joe. Good morning. As Joe noted, our first quarter performance was largely in line with our internal expectations.

We recognized some strategic milestones during the quarter. We had our first full quarter of contribution from the Sotawall business acquired in the fourth quarter of the last fiscal year, and we announced the acquisition of EFCO, which closed -- which closed this month, earlier in our second quarter. We're excited about the financial contributions, market opportunities and operational synergies both businesses bring to Apogee in our Framing Systems segment. We also made our first shipment of oversized glass units from our Architectural Glass facility in Southern Minnesota, leveraging the significant investment we made for both new capabilities and productivity with additional automation.

In terms of the results for the quarter, first quarter revenues grew 10%. We had growth in Architectural Glass and Architectural Framing Systems from the acquisition of Sotawall as well as growth in ongoing businesses, which are somewhat offset by declines in Architectural Services, as we expected, due to project timing. Earnings per diluted share were $0.56, and adjusted earnings per diluted share were $0.62, up 2% from the prior year period. Adjustments include $0.07 per share pretax for amortization of short-lived acquired intangibles associated with the acquired backlog of Sotawall and $0.02 per share pretax for acquisition-related cost for Sotawall and more so for EFCO. These costs were offset by $0.03 per share of the tax impact. We've included tables explaining the reconciliation of non-GAAP financial measures in our press release. First quarter gross margin was 25.8% compared to 26% in the first quarter of fiscal 2017. Operating margin for the quarter was 8.9%, and adjusted operating margin was 9.9% compared to the actual operating margin of 10.6% in the prior year period.

Joe covered most of the items impacting actual operating margin in the quarter, and I'll add more color to 2 items. In the Architectural Glass segment, start-up cost for the oversized production line had approximately 100 basis point impact to segment margin, in line with our plans. Had we not had this planned cost, operating margin in the quarter would've been higher than the operating margin at 10.2% in the prior year period. And in the Architectural Framing Systems segment, our receivable write-off related to a customer bankruptcy add approximately 100 basis point impact to segment operating margin. This was a very unusual situation, and we rarely experience these kinds of write-offs. We also experienced some higher material and manufacturing cost in the quarter for this segment.

I'll also cover adjustments to our Architectural Framing Systems segment results, which are included in the reconciliation of non-GAAP financial measures in our press release. Operating income for the segment was up 17% to $12 million, and adjusted operating income was up 37% to $14 million and adjusted for $2.1 million of amortization of short-lived acquired intangibles associated with the acquired backlog of Sotawall. Operating margin was 10.8%. The adjusted Architectural Framing Systems operating margin was 12.7%, up from the actual operating margin of 12.6% prior year period. Architectural Framing segment backlog grew sequentially $10 million in the first quarter to $255.1 million.

Backlog mix across the 3 Architectural segments continues to reflect strong activity in the office sector with approximately half of the overall work we have in backlog. The remaining backlog is balanced across the institutional sector, which is government, education and health care as well as the large multifamily residential projects. And then we have less than 5% of our backlog for projects in the hotel, entertainment and transportation space.

With regard to our balance sheet and cash flow, free cash flow in the quarter was a negative $5.5 million, improved from the prior year period. We generally use cash in the first quarter for normal seasonal working capital requirements, including for annual incentive comp. We continue to have strong working capital management with our days working capital metric at 51 days in the first quarter. Tax rate for the first quarter was 32.9% compared to 33.4% in the prior year period. Long-term debt at the end of the first quarter was $71.4 million. Early in the second quarter, as Joe noted, we expanded our revolving credit facility by $160 million to a total of $335 million to fund the $192 million EFCO acquisition. We now have modest leverage and an outlook for positive free cash flow. Currently, the interest rate on our debt related to the Sotawall and EFCO acquisitions is approximately 2.25% to 2.5%.

I'll turn to our outlook. Our fiscal 2018 full year outlook now includes the EFCO business acquisition, and we're providing our estimated actual outlook for earnings as well as an estimated adjusted outlook, both reflect top and bottom line growth for fiscal 2018 based on our performance trends and the visibility that we have in our market. We expect revenue growth of 26% to 28%, which includes consolidated organic growth of roughly 3% to 4% as well as revenues from Sotawall and EFCO. We expect growth in Architectural Glass and Architectural Framing Systems offset by the decline in Architectural Services. Our actual operating margin will be approximately 10.5% to 11% with the addition of EFCO revenues at mid-single-digit operating margin. Our outlook for adjusted operating margin is 11.5% to 12%. Actual earnings are anticipated to be $3.31 to $3.51 per diluted share. This GAAP earnings outlook reaffirms our pre-EFCO acquisition guidance, adding any effect of the EFCO operational contribution offset by incremental interest expense and higher tax rate as well as the acquisition-related cost, the balance which will fall in the second quarter. We expect adjusted earnings of $3.65 to $3.85 per share. The reconciliation for the adjusted earning guidance is in the outlook section of our press release.

As I've previously pointed out, we expect the declines in Architectural Services revenues to be greater compared to last year in the first half of fiscal '18 as opposed to the second half. For fiscal 2018, we expect full year depreciation and amortization of approximately $53 million. We anticipate that our fiscal 2018 tax rate will be approximately 33%. For fiscal year 2018, we continue to expect mid-single-digit growth in U.S. commercial construction markets as the market activity we see, the Architectural Billings Index, office employment, office vacancy rates all show positive momentum. Specifically, the Architectural Billing Index, or ABI, has been at 50 or better for 22 of the last 25 months, indicating sustainable growth in architectural activity. There has now been more than 80 straight months of private sector employment growth in the United States, driven by office-occupying jobs as well as health care and hospitality, all sectors that are important to our businesses. And we see balanced office market without overbuilding, and U.S. office vacancy rate, as supported by CB Richard Ellis, are stable at low levels. We feel good that our internal visibility and backlog, awards and bidding, combined with the external market metrics, support our outlook for sustained growth. We have good momentum and solid strategies that we believe continue to position us to perform better in any economic environment.

I'll turn the call back to Joe.

Okay. Thanks, partner. Before I take your questions, I'd like to underscore that we feel very good about the future opportunities for Apogee based on our bidding, awards, backlog and the external metrics Jim just highlighted and add to that our new Sotawall and EFCO business units. With our visibility, we feel very good about multiyear growth.

At the same time, the strategies we are executing around new geographies, new products and new markets are making Apogee a more diversified and stable company than we've ever been historically. We are specifically benefiting from our focus on midsized Architectural Glass projects, retrofit, Framing Systems segment, and they generally serve small to mid-projects in addition to our disciplined, reliable, repeatable business processes that are driving improved margins. In the last 6 months, we bought 2 great companies: Sotawall, a business approaching $100 million in revenue with very high EBITDA; and EFCO, a business greater than $250 million in revenue that provides us a terrific opportunity to bring their mid-single-digit margins to the same levels of Apogee, which we've shown we can do over the last 5 years.

And I was very clear on our definition of adjustments. Jim and I have shied away from adjusted earnings, and it's never happened since I've been here. Frankly, I always consider folks using adjusted earnings as a cop out to explain away performance issues. Our results that we've talked about here are only adjusted for the deal-related costs on amortization and closing the transactions. All other performance-related items we discussed are included in our results. And as I mentioned, the impact on interest, based on our decision to invest those funds, is also included in our results and not in adjustment.

So with that, Kaylee, I'd like to open the call up for our distinguished guests to ask questions. Fire at will.

(Operator Instructions) Our first question comes from the line of Eric Stine with Craig-Hallum.

So first, I just wanted to start with Sotawall. Starting to see or hear that the Canadian market is acting well and that there's recovery there. I'm just curious what you're seeing in terms of Sotawall and then also what kind of impact or inroad do you think you can make for the business as a whole.

Yes. Eric, great question, and yes, you're absolutely right. We are seeing a recovery in Canada. It has to happen. The vacancy rates are frankly nonexistent at this point. We are seeing significant amount of tall buildings being bid out right now. We just got on the scoreboard with significant win on a great building in Toronto, and our leader of that business is feeling very bullish. As you know, when we bought this company, they were primarily almost entirely driven by U.S. revenues, and we knew we had a great opportunity to enjoy the eventual uptick in Canada. That's beginning now. I think our future bodes very well for that business.

Got it. Next one, this is more kind of big picture, stepping back a little bit. You've obviously made good inroads in the mid-market. I mean, as you think about longer term and moving into this sub-5 storey market, I mean, any thoughts there? Is that something that you may be doing on a regional basis rather than kind of blanketing the country? Or what are your thoughts around that long term?

Yes. Eric, I'm not going to give away my strategies to my competitors. Let me tell you, we certainly participate in that segment in our Framing Systems business and particularly our storefront and entrance businesses, both in Canada and the U.S., Alumicor, Tubelite. Obviously, your question might've been around the Glass segment, where we primarily focus on the mid and the larger buildings. That is certainly an opportunity for us going forward. It's half the market. It does have a different logistical delivery profile. Whether or not that's in my future plans, I prefer to keep my strategies away from my competitors at this time.

Understood. Maybe last one for me, just kind of bookkeeping. And I know it's not a great indicator of the business, but I noticed you didn't give the Architectural Glass backlog growth in the release. So any details you can give the there would be helpful.

I think the backlog, it -- I think it went down a little bit. It's really becoming a very insignificant metric for that business. It's almost everything we book in that business gets shipped within 6 weeks, 5 or 6 weeks. So it's really only an indicator of our production schedule for the next month. I think the backlog went down $3 million or $4 million in the quarter. But again, we will report it in the Q. But it's really a nonmetric for us going forward. Thanks, Eric. And my accountant just threw something at me. I guess we don't report that in the Q anymore because of the insignificance.

Our next question comes from the line of Samuel Eisner with Goldman Sachs.

So I appreciate the comments on the sake of transparency and not adjusting out. I want to better understand. In your prior guidance, which was kind of an all-in number of, I guess, $3.45 midpoint, what was the -- I think you guys had said that included Sotawall amortization in there. So I'm just trying to really figure out what was in there and how do we bridge the gap between $0.30 at the midpoint between the 2 respective guidance ranges that you guys used to have and now your new guidance range.

Yes, I'll let Jim give the numbers. But let me say, again, let me gain altitude, Sam. We maintain the guidance. We mentioned when we acquired EFCO, I think in our closing announcement, that the deal was accretive to Apogee excluding the transaction cost and the short-lived intangible amortization. Obviously, the inference there was it was dilutive including those costs. That's kind of where we're coming back to -- we lowered -- it's a $0.04 change of -- in the guidance, so to speak, but that absorbs all of the intangibles and the deal-related costs.

Yes, and -- so Sam, maybe I'll just kind of bridge for a second. So you're right in that prior $3.35 to $3.55 included Sotawall in our numbers. And so for kind of a steady-state, when think about it, we add in the EFCO revenues at the mid-single-digit op margins, then we have the interest expense on the debt used for EFCO as well as we're projecting about a 50 basis point increase in our tax rate. So those 2 items, they kind of offset the EFCO contribution to get us to the new pre-adjusted GAAP guidance of $3.31 to $3.51. And that -- in terms of -- to your question in the $0.34 of adjustment associated with it, as you caught in the release, $0.24 is related to amortization for both Sotawall and the EFCO business, and it's probably about 75% or so are related to the Sotawall business in terms of higher backlog impact relative to the EFCO business. And then in our outlook, the acquisition-related cost of about $0.10 are primarily EFCO related.

And Sam, I'll chime back in again. So I -- what I didn't say well is if you took our prior range, we add in EFCO's EBIT, we add in EFCO's cost, the transaction-related cost and the amortization of EFCO and we absorb the impact of the interest of about $0.11, we come down to that $3.31 to $3.51. In other words, that $0.04 movement. But in that $0.04 is EFCO's results, meaning the profits, the transaction cost, the amortization and the interests.

And one other -- and excuse me, Samuel, just one other comment, because it may be on people's minds, which is we chose that Q4, when we included Sotawall in the business, not to report adjusted numbers and, candidly, got a lot of feedback from the investor community wanting to have better visibility on the business in really more an underlying performance perspective, given the significant amount of short-lived intangible amortization that we have with Sotawall. And so that, combined with the significance of the EFCO acquisition, led to the change in adjusted results.

Sam, we kind of got our butts kicked from folks like you that wanted more transparency on the adjustments, and obviously, it's called for now with the magnitude of this deal, the cost related to this deal. But I told you, I've always felt adjusted results were a smokescreen, and I frankly never felt it was appropriate. We stand tall to our results, strong or not, and -- but at this time, we're obviously forced to, and as Jim said, the feedback we get. We're listening. We had to do it, but we can walk you guys all the way through. But I just walked you back to that range with now the midpoint being $3.41, and then from there, we walk back up to the adjusted range by pulling out only those costs that I mentioned.

Got it. So maybe just to ask another way. The $3.45 prior number, there was about -- you said 75% of the amortization expense was Sotawall, which would have been included in that number. Is that the right way to think about that, there is roughly $5 million-plus charge in the prior $3.45 associated with Sotawall?

Yes.

Got it. That's helpful, and I appreciate that. So just a couple of other housekeeping items here. The gross margins, this has now been 2 or 3 quarters in a row that gross margins reported have either kind of been flatlining in terms of the growth and, I say, were down on a year-on-year basis in this quarter. Can you just give us kind of an update on how you see gross margin trajectory going forward? You guys were in a period where gross margins were accelerating and expanding, and now it seems as though they're plateauing, even down now in this quarter. So help me understand what's the outlook for gross margin, why is this actually now kind of stagnating, if you will.

Yes. Sam, let me read you last page in the -- but of course, I believe Q2, we'll see sequential and year-over-year improvements in the margins. If -- you got to peel back the onion in Glass. They had a very, very good quarter. We did have just over a planned start-up costs. My Glass business hit their numbers. We basically had -- you've been down to the factory, Sam. We had a significant part of the factory automation shutdown to move furnaces and cutting lines associated with the new building, where we have the oversized equipment now. It was significant headwinds that are, for the most part, they only very minor impact in Q2. Pretty much behind us, as I said. We started shipping oversized glass at the end of the quarter. So that $1 million significant impact, that's 100 basis points of margin headwinds in Glass. We talked about the Services business. Clearly, we're working through a hole in the revenue change due to the order situation of, frankly, 6 quarters ago. I can't unring that bell, but we continue to win new business and the future looks bright if you look at our backlog. In Architectural Framing Systems, again, I agree it was only 10.8% OM as reported, 12.7% if you pull out of these deal-related costs, and we highlighted 100 basis points due to the bankruptcy of a customer. It was a very tough situation. Jim highlighted totally unexpected and nonrecurring. The owner of the company died in a construction accident late in the fall. It was a terrible situation, not one of our projects. But the owner died, and the business was not able to survive. And unfortunately, in the early part of this quarter, we had to take that write-off. Again, if not for that, Sam, and I'm not -- that's in our results. Now we're up to 13.7%. We've got 100 basis point expansion year-over-year. And then if you go back to our Large-Scale Optical business, as I said, it's a gem of a business and incredibly strong fourth quarter. This is -- this business is totally dependent on the retail purchasing pattern. We've got a new ERP system. We feel great about our future, and we're looking for that business to be a great contributor this year.

Sam, specific to gross margin, I'll just maybe repeat a couple of Joe's points. But as we've talked, the key drivers for margin really across our businesses, where we are now, are going to be the leverage on volume, our productivity that we deliver and price and mix that we have associated with our businesses. From a sequential standpoint, our revenues were lower, as we had expected, and so the leverage impact that we have in both our manufacturing and in our Architectural Services business, where we need to keep all those resources because the work is ahead of us to perform. And then on a productivity standpoint, we called out of the fact that we had some higher manufacturing costs in the Framing Systems in the first part of the quarter. And so our momentum probably slowed a little bit in the first part of the quarter, back on track in the second part of the quarter. And then lastly, from a price mix standpoint, we talked about the higher aluminum cost last quarter and we talked about the fact that we had raised pricing. It took part of that quarter for that pricing to come into play. But by the last month of the quarter, that pricing was in fact. So as we look forward, we see the volume leverage, we see the productivity back online and then the improved pricing fully onboard to the next quarter forward.

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

Jim, just a clarification. Did you say the remaining short-lived amortization and other deal costs would all be absorbed in 2Q?

The deal-related costs will be. The amortization, so -- again, majority of the amortization is related to the Sotawall acquisition, and that has about an 18-month life starting from the fourth quarter of last year. So we've got a little bit more than a year to go on that. And then the short-lived amortization related to EFCO, which is a smaller portion of that, is going to start in our second quarter. And we're still fine-tuning that, but that's going to have 18- to 24-month life as we finalize it.

Got it, okay. That's helpful. Maybe in Services. Any of the new work you picked up or even opportunities you see out there, is there any ability to feel kind of some of the remaining schedule holds here I think you've gotten in 2Q? Or is that still kind of set up into next year?

The -- clearly, the awards in the first quarter have virtually no impact in fiscal 2018. The business is doing its best to try to fill in some of the gap created. We are not planning that in our financials. We don't have blue sky, let's say, out there to try to fill at this point. Virtually, everything being awarded now will be for F '19 and, frankly, F '19 and F '20. But obviously, with $100 million, I think we're off about $60 million in Q4. Some of that was planned for F '18, and we got it. We're up another almost $40 million in backlog in Q1, and I commented I expect our -- I don't give guidance to hurt my numbers, but I expect our Q2 will once again reflect the good award activity in our Services business. And unfortunately, the revenue stream will be stronger in F '19.

Okay. And then on the Glass business, Joe, I want to talk about the midsize market and sort of shift into there. Are you seeing any easing of competition or pricing in the high-rise kind of monumental projects that, potentially, you could kind of pivot back to that area?

We have not abandoned the high-rise. We still do a significant amount of business there. We are far more diversified across our portfolio, thanks to our operational capabilities that the Glass team has been able to effect through productivity, through lean and, to some degree, through CapEx and automation, consistently delivering 5 to 6 weeks. I can assure you -- I think when I got here, that business was at around 12 to 14 weeks consistently. It spiked during the 2014 time frame into 25, 26 weeks as the industry -- that's when we started to see recovery in our industry. Now at 5 to 6, we are very capable of competing for business. It's the same pricing and margin profile in the mid-segment, but we still have a significant amount of business in the large buildings. We're seeing good growth in large buildings, and I don't see any letup in that, as indicated by the building indices. There are some segments in large top buildings that we don't really participate in. Multifamily housing in South Florida, never been a target market for us. There are some argument that perhaps that's peaked out. Multifamily housing in New York, again, perhaps that's at a high point. But the rest of the office sector, which is our prime target market, continues to grow in both the mid and large.

Okay. And then last one if I could. Just what kind of spillover effect do you expect from ramping up the oversized gas -- or Glass plants? Or are those costs kind of behind us now?

Yes. I -- the costs were significant in Q1. I mentioned a little over $1 million. We wrapped up the movement of equipment in the very beginning part of this quarter, I mean, the part of this month, I -- maybe 10 basis points or so in the quarter. I expect the business to outperform and offset that. One way around the barn and say, yes, it was a first quarter -- frankly, the costs have been going on for a little bit, but it was significant in the first quarter when we actually shut down lines and moved equipment.

Our next question comes from the line of Chris Moore with CJS Securities.

Let's start maybe with the -- on the operating margin, just real quick. On the Services side, obviously, down significantly on volume. Based on the type of business that you're seeing, can you get those margins back up to the 7% to 8% in fiscal year '19?

Yes, I absolutely feel we will be back -- my long-term goal for that business is to get to 10% operating margins, and we still have a path to get there. We will, of course, manage our costs acutely during this downturn, and the business is doing everything it can to maintain its growth trajectory for the future while addressing short-term cost opportunities. And yes, Chris, I fully expect our margins will see substantial improvement in F '19 and F '20, and we'll be back on the path where we were in F '17.

Okay, got you. And similar conversation with the EFCO operating margin, just in terms of -- going from wherever -- the 5% or 6% that's now to 10%, is that a 3- to 4-year time frame? Or are there some low-hanging fruit that accelerates that a little bit? Or how do you look at that?

Well, we identified what we believe to be $10 million to $15 million in cost synergies. Obviously, that's 2 to 3 points of -- or 200 basis points plus of margin expansion from our opportunities, primarily around supply chain. I -- listen, it was a 5-year journey from us here at Apogee. We'll try to be faster than that, certainly with all of our learnings. I believe 3- to 5-year journey to get to double-digit operating margins is an appropriate comment for me to make, and obviously, I will have aggressive goals with my business. It's a great business. They were part of a wonderful company called Pella, a residential window business, significantly, substantially larger than EFCO. As great a company as it was, their DNA was not commercial construction. The leaders of that business have great opportunity, great ideas on doing the same kind of margin expansion opportunities we had -- have done here, some of it involving CapEx, some not. And the kind of company we are, we're prepared to make those bets in a business that we know and love.

Got it. Last question, just back on the intangibles. So Sotawall, basically, an 18-month life started from this January; EFCO 18 to 24 months, just starting. Is that -- is it reasonable to think that the amortization is smooth over that time frame? Or was it a little bit more accelerated in the beginning? Just wanted to get the ...

Yes, it's smooth over that time frame.

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

Joe, a couple of questions. Number one, if the market continues to grow in mid-single digit, is there any need for Apogee to spend money on capacity additions? Or can you still focus on productivity improvements?

We -- both. But I would say that majority of our factories are capacitized to support our 3-year growth trajectory. We have certain bottlenecks we'll address. The CapEx spend will not be of the magnitude that would -- let's say, be a major announcement, $50 million coder, $100 million new factory. They would be more -- some of our -- some operations $5 million, $7 million, $10 million-type investments. I'm confident. And we're looking at those right now and planning for them. They'll be in our CapEx plans. The double-digit growth in Framing Systems, that's probably where we'll be making those investments. But they'll, for the most part, fly below the radar screen of the kinds of numbers you may be thinking of. Productivity investments could be substantial and only would be embarked on with significant return on investment.

Okay. Does Sotawall or EFCO, in isolation, require much CapEx spending?

No. Not on -- of course, there's CapEx opportunities that teams are reviewing Jim and I will make those bets. I highlighted that a moment ago some bets that I think the prior parent just was unwilling to make because of where they wanted to focus their cash. But as far as -- the investments would be more on the productivity side versus capacity.

Okay. And then lastly, could you remind us how -- what the -- sort of the market opportunity for the oversized glass business is? And is there a -- until you get to a certain level of production, is there sort of a drag on earnings from the oversized start-up?

No. The drag on earnings in the quarter was associated with the rearrangement of the factory. From here on forward, the margin will fall through as we book the revenues. We're gaining -- we've already achieved our F '18 revenue awards. The awards that we will revenue this year, that we committed to our Board of Directors when we made this investment, we're actually well beyond that. But -- and a lot of business we're getting, Jon, comes because we're capable of the oversized, even though 3 quarters of the project fits within the size capability that we had prior. But we were starting to lose business because we couldn't do the podium or we couldn't do a particular elevation, so we lost the entire order. For years, we were able to convince people to go back to a design within our capabilities. That became harder. This is a really good thing for us. It -- the larger the window, the higher the window, the wall ratio, the more glass content on the same size building, more glass, less panels, more glass, less stone, that's good for us. Operator, we have time for one more question. I -- we have an Annual Shareholders' Meeting, so I got to hard stop in 9 minutes. And I would like to wrap up with one more question, please.

Our last question comes from the line of Julio Romero with Sidoti & Company.

So I'll keep it brief. Just to touch on EFCO, I understand mid and small-sized project exposure, favorable in terms of the more stable revenue stream. Could you give some additional color on how EFCO positions Apogee in the institutional category of nonres construction versus your current leverage to the commercial and office segment, maybe touch on exposure to schools, hospitals and the advantages you see of working on those projects versus office?

Julio, this is Jim. I'll cover that. So that's a great question because one of the strategic fits that we were attracted to at EFCO is they're very strong positioned, particularly in the education market. When we look across our Framing Systems business, one of the areas where we had opportunity in terms of product extensions was in kind of a more, I'll call it, standard, but it's -- I don't want to minimize the complexity and the engineering component, but products that are really attractive in kind of the lower and secondary education market as opposed to the university-type sector. And the EFCO business has an existing very strong position with products that they have, in some cases, products that we didn't have, particularly to that market across the sector. One of the other areas that is separate from the institutional sector is in terms of their historic product offering. As you know, we've really been focused on driving our retrofit business, and they have some differentiated products that we didn't have that really complement our efforts in the retrofit area, some of which are tied to the education sector, but then also, more broadly than that, in other institutional, the government-type buildings and private buildings as well.

Thank you. Julio. Okay, Kaylee, I'm going to -- let me wrap up here.

Hey, folks, listen, thank you for calling in. I told you we would explain the adjustments. I would tell you that we hear from you guys. If I've gotten any feedback, it's that we provide probably more guidance or more business explanations than most. If we've gotten some criticism from you, it's perhaps we don't explain adjustments well enough. I hope we've scratched that itch today. We're prepared to -- we'll be talking with many of you in follow-up calls. We'd be happy to continue to go into all the detail you need to understand these adjustments so you don't guess incorrectly.

I think you can tell I am very passionate about our opportunities, about our end markets. I'm passionate about Apogee. I love this place, and the best is yet to come.

Have a great day, everybody, and we'll talk to you soon. Thank you.

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