Apogee Enterprises Inc (APOG) 2018 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q3 Fiscal 2018 Apogee Enterprises Earnings Conference Call. (Operator Instructions) As a reminder, today's conference call is being recorded. And now I would like to turn the conference over to Mary Ann Jackson. Please go ahead.

Thank you, Candice. Good morning, and welcome to the Apogee Enterprises Fiscal 2018 Third Quarter Conference Call on Thursday, December 21, 2017. With us on the line today are Joe Puishys, CEO; and Jim Porter, CFO. Their remarks will focus on our fiscal 2018 third quarter results and our outlook for the fiscal 2018 full year. During the call, we'll 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've called out adjusted earnings related to our recent acquisition and tables reconciling non-GAAP financial measures are included in the 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 discuss Apogee's strategic transformation, and then Jim will cover the results. After they conclude, Joe and Jim will answer your questions. Joe?

Thank you. And good morning, everyone, and welcome to Apogee's Q3 conference call. I'd like to underscore that we continue to execute a transformation strategy at Apogee that is positioning the company to deliver a more stable performance throughout any economic cycle. We are diversifying our revenues into our broader mix of end markets and project sizes and into new geographies. At the same time, we are reshaping our business mix to be more centered on our Architectural Framing Systems segment, which we have now grown to be our largest business segment, and one that has historically outperformed our commercial construction markets. The Architectural Framing segment has consistently grown organically and profitably over the past 5 years, with revenue compounded annual growth rate of 17% and operating margins more than doubling in that time. It also grew revenues and maintained positive margins through the last downturn. As we integrate, achieve synergies and improved operations in our 2 recent acquisitions, Sotawall and EFCO, we expect the Framing Systems momentum to continue to accelerate. Let me peel the onion back on our 4 reporting segments, as we have a very impressive situation. I've already highlighted the strengths of our Architectural Framing Systems segment. Current results are impressive, and we have created our own opportunities with our acquisitions. The large-scale optical segment is performing well, achieving substantial and sustainable operating margins and is beginning to make headway on its new engineered optics markets, adding revenue diversity to this segment, and this segment reflected impressive year-over-year results in the quarter. The Architectural Services segment has significantly grown its backlog for the last 4 quarters and likely the next quarter, positioning this business for near record results in fiscal '19 and continued growth out a few years beyond that. Although this segment has produced significant fiscal 2018 negative year-over-year comps for us, the backlog represents just the opposite for fiscal '19 and the 370 basis points sequential improvement in third quarter operating margin reflects this momentum. Although, we expect our fourth segment, Architectural Glass to achieve the second best revenue and income performance in its history, this year as we leverage investments and capabilities and productivity, increased competition in both large and midsized projects is pressuring top and bottom line growth. Despite these headwinds, we continue to drive best-in-industry lead times with outstanding quality and service, and we are introducing additional new products. And this segment has added more operating income to Apogee over the last 6 years than any other segment. Our efforts to reshape Apogee, what I characterize as we're not your father's Apogee, are yielding revenue and growth opportunities from broader geographic coverage, increased penetration in the midsized and smaller projects and a more extensive product line. At the same time, we are leveraging operations excellence, automation, project selection and cost discipline to improve our margins. I am pleased that overall, we are generating considerable momentum as we transform Apogee into a business led by our fast-growing Architectural Framing Systems segment, with Architectural Services poised for significant growth and Architectural Glass and large-scale optical delivering substantial operating income. In the third quarter, adjusted operating income excluding acquisition cost and short-lived amortization from the acquisitions of EFCO and Sotawall was up 14%. The adjusted operating margin, though, was down with the inclusion of the lower margin EFCO results and lower Glass and Services revenue and operating income. By segment, our Framing System segment again generated excellent revenue and operating income growth in the third quarter, with revenues up 114% and adjusted operating income up 81%. I'm extremely proud that our 4 legacy businesses in the Framing System segment grew revenues 17% with triple digit operating margins. These core businesses have delivered strong results quarter after quarter. Regarding our recent acquisition, Sotawall and EFCO are performing to plan, and we're making good progress on our EFCO synergy goal of $10 million to $15 million in 3 years. I'd also like to note that we've hired a new President for EFCO, who'll be starting in early January. He has extensive manufacturing experience including lean operational improvement tools. I'm very excited to have him take the helm at EFCO in just 2 weeks. Third quarter Architectural Glass results were impacted by the hurricane delays in Florida, as noted in the release, as well as continued competitive pressures on large projects and recent pressures on midsized projects as national and regional competitors respond to our growth in this segment. We are seeing large projects coming back to Viracon, which will help for fiscal '19 and beyond. I also believe that the proposed tax legislation will help level the playing field for this business versus our international competitors. Large-scale optical had strong revenue and operating income growth in the quarter and our Architectural Services segment showed substantial gain sequentially and again, grew backlog to position itself for future growth.

Turning to the outlook. We continue to be extremely optimistic about Apogee's future and the outlook for our markets. We are lowering our guidance for full fiscal 2018 due to lower-than-expected volume and pricing, primarily in Architectural Glass and higher-than-expected healthcare costs. In addition, our outlook now reflects planned fourth quarter restructuring charges, as we leverage investments we have made to improve efficiency. More on this restructuring in a few moments. Our revised outlook reflects a slower-than-expected second half for Architectural Glass due to the competitive challenges I've described. I'd like to underscore that the investments we've been making to improve efficiency in this business position it to maintain its leadership position and deliver solid results. Its operating margins are at historical high levels today. We are pleased with our progress in diversifying our portfolio and building a stronger, leaner more productive organizations. Position to deliver more stable performance over an economic cycle. Strategies, we are attacking or to achieve these results include growing the top line through new geographies, products, end markets and improving margins via lean and automation productivity initiatives. Our capacity and automation investments in productivity improvements to date have enhanced efficiency and added capacity. We are taking restructuring actions to leverage these capacity increases in early 2018. We expect to incur approximately $4.5 million or $0.11 per share for these restructuring projects in Q4, and our calculating a payback of 1 year as a reduced cost immediately and permanently, translate that to an equal dollar amount of savings in fiscal '19. We will provide further details on our plans when we report them in just a few weeks.

Looking ahead in fiscal '19, we continue to anticipate double-digit organic revenue growth and triple-digit basis point improvement in operating margin. We are generating considerable momentum as we transform Apogee into a business led by our fast-growing Architectural Framing Systems, with architectural Services poised for substantial growth and Architectural Glass and Large-Scale Optical delivering significant operating income. We continue to believe that North American commercial construction markets will grow at least throughout fiscal 2020, based on what our businesses are seeing and hearing in the marketplace from architects and from customers and the work they are bidding on and the projects we've won as well as external metrics, which remain positive. Just yesterday, the latest ABI score, the Architectural Billings Index, for November, was at 55. Another month of strong billings at the architects, with all 4 regions in the United States in all 4 sectors that they track showing favorable results. Also, job creation in the office sector, healthcare and education are 3 most important segments continue to be extremely positive. Our pipeline of potential work is better than what we saw earlier in the year, and as a result, we are actively considering additional Framing Systems segment investments to further drive organic growth in new geographies as well as to continue to improve productivity. We are doing what we said we would do, driving productivity and efficiency to enable Apogee to deliver more stable performance over an economic cycle. At this time, I firmly believe that Apogee is positioned to grow and deliver historically high levels of revenues and operating margins. Jim Porter will now cover the financials in more detail.

Thanks, Joe. Good morning. Apogee drove increases and revenues operating income and earnings per share in the third quarter. And we continue to see positive North American architectural market with an outlook for multiple years of modest end market and better-than-market company growth. In our third quarter, we had significant year-on-year improvement from our Architectural Framing Systems and our Large-Scale Optical segments, and sequential increases in the Architectural Services segment. In Architectural Glass, we experienced headwinds we didn't expect from hurricane-related project delays as well as greater competitive pressures, as Joe described. Apogee revenues were up 30%, down 2% excluding the Sotawall and EFCO Framing Systems acquisitions. The decline in Architectural Services revenues was largely expected and driven by timing of project activity. While Architectural Glass was down from hurricane-related delays and lower volume of larger projects. Offsetting this was double-digit revenue growth in Architectural Framing Systems, excluding the acquisitions and the Large-Scale Optical. Gross margins for the quarter were 25.7% compared to 26.6% in the third quarter of fiscal 2017. The third quarter operating margin of 9.7% and adjusted operating margin of 10.6% was down from 12.1% in the prior year period. The lower margins were driven by including lower operating margin EFCO business as well as lower volumes in Architectural Glass and Architectural Services. Earnings per diluted share were $0.82 and adjusted earnings per share of $0.90 were up 15% from the prior year period. Included in our third quarter operating margin and earnings per share adjustments are acquisition-related cost and amortization, of short-lived acquired intangibles associated with the acquired backlogs of Sotawall and EFCO. Our reconciliation of the adjustment is included in our press release.

Turning to third quarter's segment results. Architectural Framing Systems segment revenues were up 114%. Excluding the acquisitions, revenues were up 17%, with growth in each of our legacy businesses from share gains from premium service levels, quality and lead time along with geographic growth. The segment's year-on-year third quarter adjusted operating margin declined. 11% operating margin compared to 13% was driven by the addition of EFCO, which has a lower operating margin profile. We're on track with regard to EFCO synergies and continue to believe we will bring its margins up to comparable Framing Systems levels over the next few years. Architectural Framing Systems backlog was $448.8 million, down sequentially from timing of new awards on some longer lead time projects.

Today, more of the segment revenues are from work that is book and bill within the quarter rather than a longer lead time projects that get captured in backlog. I want to give some advance note that in the fourth quarter, we're planning to move some large project work that was originally scheduled for EFCO or in our Framing Systems segment to the Architectural Services business. And during the fourth quarter, we'll move the corresponding backlog, since this project will be executed by the Architectural Services segment. Although Architectural Services revenues were down 24% in the quarter on project timing and a slight impact from the Florida hurricane, we did see sequential growth in revenues as well as corresponding operating margin improvement on volume leverage and project execution. Segment backlog grew more than $20 million sequentially to $346.3 million, and it is up an impressive $150 million year-on-year. And we have a nice pipeline of work that continues to flow into backlog and expected to again increase in the fourth quarter, excluding any adjustment we could make from an EFCO Framing Systems backlog transfer. Architectural Glass third quarter revenues declined 9% for reasons that we've already noted. The architectural Glass operating margin was 9.4% compared to 10.9% last year on reduced volume in a lower pricing mix.

Finally, the Large-Scale Optical segment had a great quarter as revenues and operating income increased on strong framing Glass and acrylic orders from customers to meet their holiday requirements, which should place earlier this year compared to last year. Backlog mix across the 3 architectural segments remains consistent with the second quarter levels and continues to reflect strong activity in the office sector, with almost half the overall work -- of the backlog work in the office sector. Multifamily residential projects account for approximately 30% of the backlog. Institutional, where we combined government, education and health care, is approximately 20% with education the strongest component. And less than 5% of the backlog projects are made up of hotel, entertainment and transportation sector.

With regard to our balance sheet and cash flow. Free cash flow in the quarter was $13.3 million and year-to-date was $27.3 million. We continue to have strong working capital management. Year-to-date, the company has paid cash dividends of $12 million. Tax rate for the quarter was 29.1% compared to 32.1% in the prior year period. Our debt at the end of the third quarter was $232 million. The current interest rate on this debt is approximately 2.75%. Our net interest expense year-to-date was $3.2 million compared to net interest income of $300,000 in the prior year period due to increase in debt to support our recent acquisitions.

I'll now transition to talk about our outlook. We continue to feel good about Apogee's future. Even though we are revising our guidance down for full year fiscal 2018. Our current outlook does not include the effect of tax reform legislation, which I'll comment further on later in my remarks. The revisions to our guidance are driven by 4 things: Lower volumes and lower pricing, primarily at Architectural Glass; higher healthcare cost and the planned restructuring charge. We're now expecting full year revenue growth of approximately 20%, reflecting the impact of hurricane-related delays and other project timing. We're projecting an operating margin of 8.6% to 8.9%, which includes the estimated $4.5 million restructure charge. And we're projecting an adjusted operating margin of 10.1% to 10.4%, which treats the restructure charge as an adjustment and it is excluded in this adjusted operating margin guidance. The drivers of the reduction in our adjusted operating margin outlook in order are lower volume leverage, higher health care cost and price mix at Architectural Glass.

Earnings per share are now expected to range from $2.58 to $2.68, including the approximately $0.11 per share of the restructuring charge as discussed. An adjusted EPS is projected to be $3.04 to $3.14, excluding the restructuring and acquisition-related items. The restructuring is expected to generate approximately $4 million in annual cost savings or approximately $0.10 per share positive impact at the current tax rate starting in fiscal 2019.

For fiscal 2018, we expect full year depreciation and amortization of approximately $54 million. So when you anticipate that, our full-year fiscal 2018 tax rate before factoring and tax reform will be approximately 32%. Relative to the tax reform legislation just passed, there are still some open issues that we're evaluating for impact on our fiscal 2018. We will see a pro-rata rate benefit from a lower federal tax rate for the final 2 months of our fiscal 2018. We will likely have some partially offsetting discrete transition items, but all in at this point, we are expecting to see $0.01 or $0.02 per share favorable impact in the fourth quarter.

Preliminary for fiscal 2019, we are estimating an expected tax rate in the range of 23% to 24% and this compares to our prior estimate for a tax rate of approximately 33%. This will be a strong positive for Apogee. We continue to expect sustained growth for Apogee based on our internal visibility from backlog, awards and bidding and forecast for low to mid-single-digit growth in U.S. commercial construction markets at least through fiscal 2020. We have good momentum and solid strategies that we believe continue to position us to perform better in any economic environment.

Now I'll turn the call back to Joe.

Yes, thanks, Jim. Before I take questions, I reiterate my position on longer-term outlook for Apogee. In fiscal 2019, we project double-digit revenue growth organically, as I've mentioned, and triple-digit basis point improvement in operating margin. Of course, we'll provide much more detailed guidance with our Q4 update. We are transforming Apogee into a business, better balanced by our fast-growing Architectural Framing Systems, with Architectural Services poised for massive growth and our Glass and Large-Scale Optical segments delivering substantial operating income.

Candice, I'd like to open the call for questions, please.

(Operator Instructions) And of our first question comes from Brent Thielman of D.A. Davidson.

Joe or Jim, the competitive pressures that have impacted the guidance, you've talked about some of those issues in the last quarter. I guess, what's changed that wasn't expected back in August with respect to some of those issues and is the situation getting any worse in the current quarter?

Yes, I would say -- this is Joe. We gain some substantial share over the last 3 years in this mid-market segment. It is virtually replaced this share, we've lost in the large project segment. That share loss primarily came from the international competition that entered that segment when euro and dollar dropped -- the strength of the U.S. dollar brought the rate down substantially and rather than to play a price game in a large segment, we offset that in the mid-market. Our growth in the mid-markets was substantial and then topped out right at the end of the second quarter. I would say that the regional competitors kind of got tired of losing share and started fighting back with price. We feel we can maintain the share we've gained. We're at a point though where gaining further share is becoming more challenging at current pricing. The good news, Brent, is with the euro -- with the dollar and euro, we're now at about [$1.18, $1.19]. We're starting to feel some relief, so the future looks better for what is still our largest piece of business and Glass still come from the large project segment. Viracon has been winning substantial new awards in this space, many of our customers who ventured into European Glass has started to come back for many reasons and the exchange rate has helped. We need it to move further. I believe the tax legislation helps level the playing field, where we're competing against companies that have the substantially lower tax burden. That bodes well. We continue to make investments, so that we can effectively continue to move down stream in Glass to the smaller projects. That takes some time, but bodes well for future growth at Viracon. Specific to your question, I believe, that we are currently looking at competitive field that has leveled, but has awarded future growth opportunities in the mid-segment. But we've grown that segment substantially over the last few years, I believe we'll maintain that. So the Viracon business is sort of bouncing along the top at historical levels and we believe with the delay primarily from the hurricane issues in Florida, roughly $8 million, as Jim explained, or we explained in the release, pushing into F '19 and some other actions that we're taking -- give us some opportunities in the Glass business to be -- continue our profitable journey.

Okay. And then Joe, I guess, specifically on the restructuring actions, what business or businesses, is that primarily focused?

I'll announce that in about 2 weeks. Brent, I'm sorry I won't comment on that today.

Okay. Okay and then, I guess it'd be helpful, if you give any more color around, kind of what you think is going to support that triple-digit operating margin improvement next year? Because I think you can get there with Services just given the visibility you have. But how do we think about some of the other businesses in terms of margins next year?

Yes, the Framing Systems business continues to be a juggernaut. It's a more fragmented end marketplace. We're not even remotely close to having a full geographic coverage in United States. I referenced in my comments, geographic expansion in those businesses, which we're reviewing currently and lots of opportunities there. The 2 acquisitions we made have opportunity to improve their operational performance. I will tell you the EFCO business performed quite well in the quarter, even with the inclusion of amortization they performed very, very well in the mid-single-digit operating margin including those headwinds, and we are on a path to bring that up to double-digit operating margins. They are focused on their core smaller projects market. We're not elephant hunting out of that business, which they were doing before the acquisition. Hence Jim's comments about, we may be transferring some backlog from that segment into our large project -- a business that can handle those well, our installation Harmon business, which we call our Services segment. That has not happened yet. So all the backlog comments, we made, are clean organic growth. You mentioned the growth in our Services segment will be massive year-over-year. We are winning business in engineered optics and Large-Scale Optical. I mentioned some of the headwinds in Glass work to our favor in fiscal '19, and with what we have going on in Framing Systems, I'm confident in our forecast for that business. Nothing has changed our end markets, except, frankly, getting a little bit better as is evidenced by a Dodge Construction data forecast, the ABI, job creation and now, hopefully, tax legislation, that levels our playing field. So I have a lot of confidence and I'll roll up to that, it is not an aspirational number, it's how we are rolling up in our current forecast.

And Brent, it's Jim. I'll just add a couple of points that are kind of more from an overall perspective. One is, we do anticipate volume leverage really across all of our businesses, which helps. But then also, we continue to have our goals for overall benefits from productivity and lean of roughly 50 basis points a year and believe that implicit and what Joe is talking about includes continuing that.

Okay. I guess, one more if I could. The work that you're picking up in Glass today is it at better margin? Or better pricing?

It's at similar margin profile to what we have been experiencing. And we, as you well know, we launched an oversize or, for the larger glass project, we are exceeding our expectations that has helped the situation. The margins are better on the oversized Glass. We'll continue to grow that business next year, which will help offset some of the competitive dynamics I've described this morning that affected Q3.

And our next question comes from Chris Moore of CJS Securities.

Yes, maybe we can stay with the Glass for a little bit. So just on a relative basis, if I'm looking at that kind of a mix between big building and midsized in fiscal '18 versus fiscal '19. Can you talk about -- kind of what that evolution?

We lost you there for a second.

Okay, yes. So...

Yes, I think you're asking about the mix of large project...

Yes, for Glass, large versus midsized and then trying to understand, given the dynamics, what that is going to -- how that's going to change if at all in '19?

Yes, I think I'll stay out of this, Chris. For the most part, I don't think, it will change much. Where we're starting to see some success in winning back some of the larger project, particularly from international competition. That work, it doesn't start to revenue kind of on average for a year from when it's awarded. So it's probably more a second half fiscal '19 benefit in terms of winning back some of that larger project awards. But I think, we'll probably see a little bit of a pickup back in the large-size project market, but we won't see a material change.

Got you. And for the operating margins, it sounds like -- one of the things you call that was the price mix on Glass. So my understanding was that the midsize and the large projects were pretty close in terms of operating margins versus, is that correct? And secondly, what am I missing there?

No, generally, you're correct. So when do we look at the impact on that quarter, the kind of price and mix factor was kind of the least driver of year-on-year, is more volume related. As we look into Q4 then price and mix starts to become a little bit more comparable to volume from that perspective. But I think it's -- we've seen -- what we saw in the third quarter was -- kind of coming into the quarter we saw a little bit of volatility, because we do have visibility on the margin and work that's entered into backlog. And we kind of saw some up and down and then we've seen a couple months of -- more of -- kind of, maintaining at that lower price point and that's, kind of, for both midsized project market and the large project market. So there is not a long winded answer, I mean, we don't see a material difference in terms of the profile of the different projects from a margin standpoint.

The market share we lost in the core market primarily to the international and fusion, those are revenuing right now, the work we lost 2 years ago. So we're really feeling the hurt, currently. The tide -- the winds of change are happening. And we expect in starting in about a year from now and then beyond that, we'll start to feel the revenues for coming back to Viracon. We did lose more share this year than we planned in the large market segment. But things are working to our favor with quality, delivery. The long logistic supply chain, when you experience it, awakens people's eyes to the problems that 1% of the construction cost of a building can have on all the downstream trades when you don't have perfect delivery metrics, which we are a leader in delivery at Viracon. We'll win this share back.

Got it. From a -- looking at automation productivity discussions that we're having for a long time. So if you -- obviously on the large-size Glass -- on the big building's large-size Glass, but in terms of kind of a relative focus, is -- does that automation productivity been focused more on midsize? Or large? I'm trying to understand, it sounds like the midsize market is -- the competition is kind of pushing back a little bit. Is there more room on -- from a cross standpoint on the midsize?

The automation investments we've made, apply to everything going through our factory, jumbo down to small, and projects large and projects small. There is substantial opportunity to continue to invest in machinery and equipment and our Glass business. We've only completed, we would call Phase 1 of automation. We are contemplating further investments that would remove material handling of Glass throughout the entire process of Glass receipt to insulated Glass unit shipment. But it apply -- our automation applies to everything going through the factory and we're only halfway through what would be -- what the Glass -- our Glass team would like us to invest in their factories, we're only halfway to our end journey of automation.

Chris, when you think about it. From an operational standpoint that execution or production of midsize versus large projects isn't much different, because large projects, as we've discussed, they actually get broken down and produced and delivered in stages to a construction project. So we've broken down into multiple shipments. Where the key attribute is relative to our automation is, the enablement for us to get the consistent sustainable shorter lead times, which was, first of all, important to be able to access the midsized project market, but as we compete today, we're actually in a industry-leading position, not just in quality and product choice, but in lead times to deliver to the market for the midsized project market.

Got you. And I would assume there's still recognition in terms of, obviously, regional fabricators are coming in, but in terms of the quality of the Glass that you're offering, you're still getting a premium for that versus those guys, no?

Versus post temperable Glass, yes, we have a premium over that. Yes we have [skinnied] our margins a little bit to maintain the share gains. But we still rely on quality and delivery as our prime attribute for winning business.

Got it. And one last question. The potentially moving sum of that large project work from Framing to Services in Q4, does that have any margin implications? And is that a temporary thing? Or is that likely to happen into '19?

No, no. We're talking about the execution of one project in particular that I would say was -- the business -- the EFCO business had booked, that was out in front of for their [skies] that could better be managed. The project itself could better be managed by our Harmon business. So our 2 teams are working together collectively to execute this large project.

We're still getting our arms around it I mean, it won't have an impact kind of from an overall standpoint. If it does have a minor kind of segment impact. We'll make sure to call that out.

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

Could we just start in Glass? I know in the past you've been hesitant to talk about the plans and going after the small projects, and I appreciate that. But I mean, anything you can share in terms of the investments you're making today, as you work towards getting into that segment in a bigger way? And then just more broadly for Glass, given all your commentary about competition, but also what's going on in the overall market? I mean, from a high level, is that the segment that we should expect to see growth year-over-year next year? Or is it -- you think it's more of a flattish revenue grower where there is margin expansion?

Yes, first off, Eric, I don't like to talk about my strategies when competitors are listening. I can assure you, we have growth opportunities. If we expand our segment presence in the total marketplace for fabricated Glass units. We have prepared to do that. The process will take time. It will pay dividends. I'm sorry, I'm not going to get into more detail. The -- a large project, we are -- in -- New York is an example, we kind of feel that market is topped out in large towers. We're still winning business, there's still awards happening. But the rest of the U.S. continues to show growth. Going forward, that should translate well to our Viracon business, our Glass segment. I do think we have offsetting headwinds that we've already mentioned around price and competition in the Glass segment. But we have some things working for us, which is the delays from the hurricane. They didn't go away, they push into F'19. The aforementioned awards that we're getting from folks that attested international offshore glass work for us, I think, we'll continue in F '19 in Glass to bump along the top with some opportunity. But I'm not projecting substantial growth in the Glass business. We will not complete our annual operating plan process with this business until the end of January. So I'm getting a little out, ahead of the cart in front of the horse here. But I expect it to be flattish to marginal growth in the Glass with substantial growth in Framing Systems and particularly in our Services segment.

Okay. Got it. That's helpful. Then maybe just turning to framing, you mentioned some kind of ongoing investments there or some planned investments there. I mean, just some detail around -- should we view that as more internal -- I mean, are you still looking at acquisitions? Are there areas within Framing that you feel like either geographically or by capabilities, you could add to?

My comments are internal, where I would not model or not positioning that we would do another acquisition in this space. We still have dry powder. Keep our eyes open. But nothing is eminent. My comments were about internal growth opportunities. We have in this very fragmented segment, where we have never had full geographic coverage in the United States, we have -- in the last several years, penetrated in the South Central U.S, the southeast U.S, we still have substantial opportunity in the U.S. and Canada to grow geographically with our core offering that we have today and our acquisitions can help us with -- to execute that. But this is all organic and internal growth opportunity I'm referring to.

Okay, thanks. Last one for me. Just turning to the EFCO standard framing. Good to hear that you've got a new head starting shortly. I think in the past, you've talked about that, that business from an operating margin perspective is 4 years behind Apogee's business as a whole. I mean, what's happened over the last few months, does it -- has it done anything to change that? That timeline, or is it still? Or that's the way we should think about it in terms of operating margin expansion?

Yes, well my confidence in achieving $10 million to $15 million is extremely high. We've already completed negotiations for aluminum purchases, leveraging the other Apogee assets purchases and we'll be looking at substantial year-over-year improvements in aluminum, directly going to the EFCO business. My Apogee team and talent from our other business units have descended upon that business to help them make improvements. We've mentioned a particular project or 2, where our very qualified large project team at Harmon has in effect taken over the reins to help them execute these projects at better results. The business has performed quite nicely and has -- and since the last quarter every month has provided me a little upside on the results and I am pretty pleased with how the business is performing. I'm 100% confident taking this business, which is at margins like we had in Framing Systems 5, 6 years ago to the kind of numbers we enjoy today in Framing Systems. There in the same marketplace, they have the same model for manufacturing. We will get the business there. So we're off to a great start at -- in EFCO in particular.

And then again procurement is where really the low hanging fruit is. And we've already put in places. Joe mentioned, a number of opportunities, which will kick in really at the beginning of fiscal '19, some even right at the end of fiscal '18. And then we've deployed along with the other resources, Joe mentioned, our kind of lean productivity, improvement team and have had a number of successful Kaizens and other activities there. That's a slower build. And so I think the time horizon continues to be out there, but have really good momentum to be able to achieve those improvements.

Our new President, Eric. He's been a business unit president, CEO. He's worked in the PE world. He's had long 10 year at really premier companies. But he's been running full P&L's and balance sheets for the last 15 years as a leader, and we got a real great person to run this business. That team is excited. And I would tell you, the EFCO team has embraced all the help that Apogee and our other business units have brought to bear on the business. So it's, I would say, I'm very delighted with how EFCO is performing right now.

And are next question comes from Samuel Eisner of Goldman Sachs.

So just going back to the comments that you were making before about competition in Glass. I think Joe, you kind of arguing that your -- the reduction in the U.S. tax rate actually going to allow you to be more competitive versus imports. I was wondering if you could take that same logic and apply it to the medium-sized market. If you're already seeing pricing competition there, do you actually think that you'll retain the entirety of the tax benefit? Or does that get competed away over time, if they're already being price competitive?

I think we can retain the entirety of the tax benefit. I believe it gives us a competitive advantage against the international players in the large segment that we've lost in the mid-market, Sam, we're all -- we're competing with local, regional and smaller national competitors that, frankly, enough is enough Viracon is taking too much share. And they've [fought] back, we continue to fight with our product and pricing to continue to maintain or gain share in that space. And in the mid segment, it's the taxes irrelevant to competition. It is not irrelevant on an international side. So perhaps, we'd be willing to go lower to the floor competitive gains, but I think, Sam, the momentum has already turned to our favor. And if the exchange rate continues to move, frankly, we can return the favor.

Got it, and Jim just along the same lines I just want to make sure I understood your comments. You're saying that any kind of benefit either from taxes or from the change in FX rates regarding competition wouldn't really hit into the back half of next year? Is that the right way to think about it?

As it relates to the international competition, that's correct. Tax immediately, right, but in terms of how that might affect the dynamic competitive, right. That's correct, Sam.

Got it, may be transitioning a little bit on the raw material environment. I know you mentioned that there is a make versus buy opportunity with EFCO, with regards to aluminum or extrude aluminum, just curious how you guys are thinking about the overall price cost equation into fiscal '19 on Framing?

Sam, I really appreciate you asking that. Because with all the comments we had to make today, that didn't really get addressed, and it's a good story. We had been seeing some rising prices in aluminum, our industry has again. We've told all of you for the last couple of years, not just us, but our industry has gotten better. We were notoriously slow as an industry to address, rise in aluminum cost historically, took forever to have that reflected in pricing. Because the market is so fragmented, there was no real natural leader to take that first step. In historic past, somebody took a chance, raised prices, no one followed, they were embarrassed, they had to peel back, those days are behind us. We actually raised prices. I believe, it was about 8% in our aluminum -- 7% or 8% in our aluminum business. That took effect in early December. I think it was around December 8 to address the rise in aluminum over the quarter, which did provide us some margin headwinds in Framing Systems. We really didn't call it out to because the overall performance was so solid. [Duct] price increase did take effect, and subsequently, we've seen some actual relief in the aluminum prices. So it certainly bodes well for our future. We'll maintain the price increases. All of our competitors followed suit and we feel good about aluminum. Glass continues to remain quite stable. And as you know from our many dialogue, Sam, we're very, very solid on Glass. We pre-purchased the Glass, we've got (inaudible) contracts, if the commodity and Glass goes up, we reflect that in all of our bidding. So there is no delay, at all, on Glass. Lumber, we do buy a lot of lumber. You've been to our Viracon business to understand how the Glass industry packs out shipments. It's about $10 million purchase for us as a company. We're starting to see some increases there, but it's de minimus. So overall, it's a good story on input cost for material.

And Sam, just from an overall perspective in terms of aluminum to because that's probably the most volatile and it's our second largest material input is -- so first of all from an outlook standpoint, I mean the outlook that we see is flat, if anything may be slightly declining aluminum cost over the next year. But 2 things, one is, Joe said, we've been much more active and aggressive in terms of moving pricing, and we actually had 2 price increases during fiscal '18 already. But then also, kind of roughly ballpark about half the aluminum we buy across our companies is related to larger projects where we forward buy the aluminum once we're awarded the project. So we have some of that, that cover that perspective.

That's helpful and comprehensive there, I appreciate that. Just on -- just the 2019, the commentary of double-digit growth as well as the 100 basis points of margin expansion. What do you think about the phasing? Does that ramp throughout the course of the year? Does it -- is it more 2H-weighted, just given that you're having, I guess, more near-term exiting for Q seems like Glass is not performing as well as expected. So I'm just curious how to think about kind of the framework for 2019. Is it more 2H-weighted than 1H? Any kind of helpful commentary there?

Samuel, I'll just make a broad comment and then Jim can -- we have not completed the timing of our annual operating plans at this time that is a January process where we go very, very deep in all 9 businesses. I presented to the board in late February. Clearly, we'll have more guidance for you. That's a tough one to talk about in late December as far as timing. You can do the math intuitively, it's very realistic. The backlog we referenced for Services is real. These are booked awards that went into backlog at normal margins. So while the Optics, for that business have really created headaches for us. They make the overall headlines for Apogee look weaker than one would expect, based on a strong end market. Those will begin to pay dividends early in fiscal '19. All the other businesses, I'd have trouble giving you the quarterly timing at this point. Unless Jim -- do you want to...

No, I mean, I think, it's going to be more kind of gradual. The hardest thing we have in our business is quarter-to-quarter timing. But we do expect the growth in Services to start early in fiscal '19. But again, based on the timing of projects, it can fluctuate. But we would see it kind of ramping over the course of the year.

That's helpful, maybe if I can just sneak one more in -- on backlog since you brought it up. The $450 million of Framing backlog, the $350 roughly million of Services backlog, any way to think about kind of the timing of that rather than quarter it's just on an annual basis. How much hits in '19? How much hits in '20? How much hits in '21 and beyond? Any kind of phasing would be super helpful.

Yes, I'll kind of start far out and back up a little bit, because I don't have the numbers here. But I think, we actually have between framing and Services, I think it's about $80 million that's already booked for fiscal '20 and beyond. I think more of that is actually in Framing and in Services. But it might be split. So the majority of that backlog is fiscal '19.

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

So you talked about aluminum and lumber costs. Are you seeing any cost pressures in chemicals or any other raw materials related to the hurricane impact? Some other companies had talked about some supply disruption. So wondering, if you see anything on that front?

No, Julio, we don't. First off we don't buy enough and note that category to make a mark and we are not seeing anything.

Got it. Just switching over to the Glass segment or actually the business overall. Can you talk about your consolidated geographic exposure to Florida? And what it was prior to EFCO joining the company?

I don't think EFCO really lose the needle on Florida, a little bit, but not material. Boy I don't have it -- so maybe I'll just kind of start out in general, I mean, we have no geographic concentration if anything. We've been under penetrated in the southeast United States, particularly, in our Framing Systems business, as we've introduced more our hurricane-resistant products and continuing to grow that. For Architectural Glass, it's not a significant portion of the business. So I guess, short answer is, no real concentration in Florida.

Understood. And just lastly on LSO, good performance there. Can you talk about what kind of drove that outperformance this quarter and the sustainability of that going forward?

Yes, we -- listen, Jim mentioned a little bit around the timing of holiday shipments last year. Some of our largest customers didn't place a lot of orders until late December, which falls into Q4 of this year. We had a little bit movement into November. So we like to say on this business, you need to be really careful of what the quarter-to-quarter comps. We traditionally have pretty significant swings on the year-over-year comps. My point is, we continue to have a business, the golden goose will keep laying eggs. It's a mid-20s operating margin business. We're taking significant steps to expand our portfolio beyond simply custom picture framing glass and acrylic. That business is making great headways on that. And I think -- I do believe, we have an opportunity to see growth in F '19, and we'll continue to have excellent operating margins. I think Q4 will be another solid quarter for us, but I just caution "year-over-year comps are mostly driven by the timing of big orders in that business." But the business is very healthy with great plans.

That makes sense...

[To describe it as an annuity and I chuckle]at that because it's fairly accurate.

And our final question comes from the line of Scott Blumenthal of Emerald Advisors.

Picking up on the -- since we're talking about Large-Scale Optical, Joe. Can you talk about the comment you just made expanding the portfolio just pass custom framing? And when do you expect to see, I guess, kind of a meaningful contribution from some of the additional initiatives that you're taking? Will we see anything in FY '19 or is that more of a -- kind of a longer-term opportunity?

And in particular, we're talking about our engineered optics, which is basically using our technology for antireflective or conservation, but primarily, a -- our substrate onto platforms other than custom framing. Signage and other things like that, it is happening as we speak. It will have a favorable impact on F '19. In that business if I can grow $2 million or $3 million a year in expanding that way, it's 2 or 3 or 4 points of growth. So it is substantial and will have an impact on the business. So I would suggest that I am hoping to see growth in F '19 and beyond in Large-Scale Optical.

Okay, that's really helpful. And I guess, I have to ask a question about Architectural Glass. And I guess, this would probably be a little bit better for Jim. Jim you're talking about the exchange rate and its effect on competition, particularly, euro-based competition. At what exchange rate do you think you might have -- the advantage might tend to swing a little bit your way and against some of the competitors, keeping in mind that we've had a decent move already now to kind of level the playing field? Where do you think it would need to get in order for it to be maybe an advantage to domestic producers?

[Yes, we would see it being a little] over 120. But I think, as we've talked, the exchange rate is one of the factors. And we're at a point now where we're able to influence the quality, delivery and lead times to the customer to help offset that. But probably a little over 120 is where we see it really swinging.

Okay. And following up also on what you just asked, early in the cycle we see price as being the basis of competition and I know that you all have always talked about the opportunity to provide other product features and like you said, delivery and that somewhat and so forth. Price seems to still be possibly the largest basis of competition now and I was wondering, how tight the industry is now? And how tight would it need to be for price to not be may be the overriding concern when your customers are evaluating a project -- Glass for the project opportunities?

I believe the pricing is driven more by share gains on our part then end market conditions. The end markets are not saturated. As it’s been a slow burning candle, slow burning candles go on for a long time. That's what we are seeing. I think some of the hysteria that kicked in April of 2014, when the market burst a loose, created construction project delays when the contractors were overfull. We kind of lived through that. You saw that in our Harmon installation business, in F '17, where the backlog kept dropping. We said the work is there, it's just the timing issue. So the market is not creating the price issue. It's competition, it's people that want to try to gain share from us in the large project segments. It's our company trying to gain share in the mid markets. I think it will subside. I do not think, Scott, it is a longer-term issue for us, especially as I continue to feel the end markets will grow in a steady but more muted case. We didn't talk a lot about new products. I mentioned it today, but Viracon has launched some kickass new codings just recently, and we're getting tremendous feedback from architect. So my plan is to win share back with great products and great service and not rely on price.

Okay, that's really helpful, Joe. And just one more if I may. Jim, could you repeat the DNA guidance and did you give a CapEx number also?

DNA is about $54 million for this year and CapEx $55 million to $60 million.

All right, everybody. I would -- I planned to make some closing comments that would repeat things I've said, you don't need that, and we're out of time. I would simply like to add that, thank you for your time today. We'll be following up with many of you of course, and best wishes to all of you and your families for the holidays. Have a safe one, and we'll see around the corner. Thank you all.

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