Apogee Enterprises Inc (APOG) 2018 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Apogee Enterprises Fiscal 2018 Full Year and Q4 Earnings Conference Call. (Operator Instructions) As a reminder, this conference call may be recorded.

I would now like to turn the conference over to Ms. Mary Ann Jackson. Ma'am, you may begin.

Thank you. Good morning, and welcome to the Apogee Enterprises Fiscal 2018 Full Year and Fourth Quarter Conference Call on Thursday, April 12, 2018. With us on the line today are Joe Puishys, CEO; and Jim Porter, CFO. Their remarks will focus on our fiscal 2018 full year and fourth quarter results and our outlook for fiscal 2019 and beyond.

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 acquisitions and restructuring 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 progress against the strategic transformation in fiscal 2018 and plans for fiscal 2019, and then Jim will cover the results.

After they conclude, Joe and Jim will answer your questions. Joe?

Thank you. Good morning, and welcome to Apogee's conference call.

Today, after I provide commentary on fiscal 2018 and outlook for fiscal 2019 and beyond, Jim will provide his usual financial detail. And before I take your questions, I will share my longer-term view of Apogee in the context of the difference in our company today versus the last cycle. Please stay on the call.

We finished fiscal 2018 with performance in the fourth quarter that met our expectations, as all 4 segments delivered on their forecast. In addition, in the quarter, we've reported higher-than-projected benefits from the tax reform and active tax planning as usual. For the full year, we achieved record revenues, record adjusted earnings per share and generated a $127 million in operating cash flow and significantly expanded our backlog in our longer-lead time businesses to build momentum as we enter 2019 and beyond. Against this backdrop, in fiscal 2018, we advanced our strategies to diversify revenue streams and strengthen our business in order to deliver shareholder value.

Our strategies are centered on growing through new geographies, new products and new markets while improving margins through productivity and project selection initiatives. We have been positioning each of our 4 segments to achieve new levels of performance. We strategically focused on Architectural Framing Systems, which is our largest and most profitable architectural segment. The segment now serves more of North America with a broader range of products through our acquisitions and numerous new product introductions in every business unit. And we're driving organic expansion into underserved geographies in the United States and Western Canada.

Beyond current plans, the Architectural Framing Systems has plenty of runway to continue to grow through new geographies and products into improved margins through ongoing lean initiatives. We continue to penetrate midsized markets in Architectural Glass and are being awarded more large projects by reducing fixed cost through the fourth quarter closure of our Utah facility. Our Glass segment is also moving forward with strategies to pursue expansion into broader Architectural Glass markets. Our new initiatives made possible by recent capability, and productivity investments will expand the already strong EBIT and cash flow contributions from this business. Architectural Glass bidding, awards, orders and margin trends are positive as we start fiscal 2019, which bodes well for the second half fiscal 2020 and beyond.

The Architectural Services segment has the backlog and order pipeline strength to support growth in fiscal years 2019 and fiscal 2020. Excluding the sizable EFCO backlog, we moved into the services segment in the fourth quarter. The Services organization won substantial number of projects in fiscal 2018, to roll their backlog by more than $100 million this year. The business now has had 5 consecutive quarters of substantial backlog growth.

In fiscal 2017, we stated we were experiencing a timing issue, and a timing issue only with regard to the backlog reductions at that time. I believe there was skepticism. We proved our point in fiscal '18, and while this timing gives us optic -- gave us optic issues in F '18, F '19 will show substantial improvement. Our investment in new markets sectors for our Large-Scale Optical Glass and Acrylic products are expected to deliver growth for this high-margin segment in fiscal 2019. We have regularly highlighted our investments in this business and they are now paying dividends.

In addition, our building retrofit team, which won $40 million in new orders in fiscal 2018 has been expanded to help us better penetrate the substantial United States market of older buildings needing aesthetic and energy efficient upgrade. I believe the tax benefits from the new reform law will drive more building owners and managers to consider renovating older properties to keep them competitive with newer buildings. As clearly, the tax relief provides upward movement on their ROIs for these projects.

At the same time, we expect that retrofit revenues will be more steady through the ups and downs of the commercial construction cycles, again, one of my key initiatives. During fiscal 2018, we continue to reshape our business mix to be more centered on Architectural Framing Systems segment, which again outperformed our commercial construction markets.

Revenues from the legacy businesses in this segment were up 9% year-over-year, and operating margin was up triple digits. Our legacy businesses again delivered superior performance through increased pricing, share gains, increased geographic penetration, new product introduction and productivity improvement. This has been the story for 5-plus years now and we have a lot of runway ahead of us.

Our acquisition of EFCO, which is part of our Architectural Framing Systems, expands our U.S. geographic penetration and product offering. It's an ideal fit for Apogee, with operations very similar to those in our other Framing Systems businesses. Although it's come with challenges, we have the expertise and resources to bring EFCO up to Apogee levels of performance. That said, we now recognized that we are approximately 18 months behind and starting from a lower point in our EFCO margin improvement process. This reality impacted Apogee's fiscal 2018 margins, and we'll do so in fiscal 2019.

Yet this business still has all the upside, it does everything our legacy businesses do. Already, we've identified purchasing savings at EFCO that are beginning to capture in fiscal 2019 by leveraging buying of common materials. And we have line of sight for additional savings in fiscal 2020. We have started executing on operational improvements, and are being spearheaded by Apogee's Senior Vice President of Operations who is now the President of EFCO.

We've approved investment in equipment, automation and other productivity efforts at EFCO. We brought Apogee expertise to project execution challenges, we inherited at EFCO, allowing us to effectively manage the projects with no expectations for additional surprises. We have put in place a proven process for project selection, a model that has led to improved operating margins in our other Apogee businesses. We are seeing increased order activity as we are improving our on-time delivery of products to customers. I'd like to repeat that EFCO is an excellent fit for Apogee. We're committed to making it a great business in our portfolio, and it has the full potential and ability to perform at Apogee Framing Systems levels.

I'll comment on fiscal 2018 performance and our 3 other segments before moving to our outlook for 2019. In the Large-Scale Optical segment, we've maintained our strong 25% operating margin on flat revenues. And as the year progressed, investments that have been made in new display markets have begun to generate significant awards, supporting an outlook for good growth in this segment in fiscal 2019. The business is centered on the same coating technology, we use in Architectural Glass. It manufactures repetitive, though very high value-added products, allowing the greater efficiencies that yield high margins.

As we guided in fiscal 2018, Architectural Services results were down on a year-over-year basis as a result of project timing. At the same time, we've been clear that the business will be back to substantial growth in revenues and profit in fiscal 2019 due to the significant backlog bill that occurred during fiscal 2018. And frankly, late in fiscal 2017 as well. I'm encouraged that the bidding activity remains strong for projects expected to revenue well into fiscal 2021. As we manage growth in services, we continue to benefit from its high ROIC and cash generation.

Architectural Glass results were impacted by large projects lost a few years ago to international competitors and a decline in the product mix as we began to pursue less complex midsized projects midway through fiscal 2018 to continue gaining share. Let me be clear, the larger more complex value-added midsized projects continue to have attractive and better margins. It is encouraging that Architectural Glass commitment, today, are currently at 25% ahead of they were -- where they were 1 year ago at this exact point and bidding activity is strong.

In fiscal 2018, Apogee made progress on our strategies to diversify and strengthen our business. And we'll leverage business opportunities in fiscal 2019 and beyond to deliver shareholder value.

Turning to our outlook for the new year. We continue to be optimistic about Apogee and our outlook for our end markets. In fiscal 2019, we'll continue our momentum in transforming the company to deliver more stable revenue streams and earnings for the long term. We are focused on delivering operational improvements to realize our profitability goals, while we pursue investments that will serve as catalysts for revenue growth and operating margin improvement in 2020 and beyond.

In fiscal 2019, we expect to grow revenues approximately 10% and achieve a record level of operating income and earnings per share. We anticipate a year-on-year increase in operating margin. Although, the adjusted operating margin will decline, primarily due to the impact of the EFCO business, which we expect to be at breakeven in fiscal 2019. As I noted earlier, EFCO is a perfect fit for us and we have the expertise and resources to improve the margins.

Major initiatives for fiscal 2019 continue to focus on productivity and also include investing in a geographic expansion in our Framing System segment to continue our share gains success and pursuing initiatives in Architectural Glass to expand revenues in broader architectural markets. At the same time, we'll leverage recent investments to grow large-scale Optical revenues, and execute the large Architectural Services backlog. Our positive outlook is supported by external forecast for continued U.S. commercial construction growth. And our visibility includes a healthy backlog and a pipeline of projects we are bidding. U.S. macroeconomic indicators remain robust. Although, the longer-term impact of recent tariffs on aluminum and steel goods has yet to be determined. Canadian economic indicators are also healthy.

Regarding commercial construction market, the ABI and Dodge Momentum Index continue to indicate future growth. And projects started in Canada are anticipated to rebound in fiscal 2019 as well. Certainly, based on forecast from ConstructConnect. Apogee's internal visibility supports our outlook for growth through fiscal 2020 and into fiscal 2021 for longer lead-time work. Although we are not providing fiscal 2020 guidance, we are projecting continued growth in revenue and operating income out 2 years. We are not seeing any slowdown in commercial construction markets beyond fiscal '21 either, but that is too far out to guide.

We have a great business that is delivering value to shareholders as we execute our strategies to diversify and strengthen our company.

Jim will now provide more details on the financials.

Thanks, Joe. Good morning.

I'll start with additional discussion of full year results and then review fourth quarter results and our fiscal 2019 outlook.

Fiscal 2018 saw record revenues for Apogee, up 19% to $1.3 billion, but down 4%, excluding the Sotawall and EFCO Framing Systems acquisitions.

We had a decline in Architectural Services revenues, which was largely as expected and driven by timing of project activity, which we knew coming into fiscal 2018. Despite growth in midsized projects, Architectural Glass revenues were down due to a lower volume of larger projects and hurricane-related delays.

Revenues in our smaller segment of the Large-Scale Optical were down slightly. Offsetting these declines was 75% revenue growth in Architectural Framing Systems, with 9% segment growth excluding the EFCO and Sotawall acquisitions, from increased pricing and continued share gains in geographic growth.

Gross margin was 25.1% compared to 26.2% in fiscal 2017. The full year operating margin of 8.6% and adjusted operating margin of 10% were down from 11% and 11.2%, respectively, in the prior year. Both gross and operating margins were down with reduced volume leverage in Architectural Services and Architectural Glass, inclusion of EFCO currently at lower margins and costs for shutdown of the Architectural Glass factory in Utah, all somewhat offset by improved productivity across all segments.

Fiscal 2018 earnings per diluted share were $2.76 and adjusted earnings per share were up 7% to a record of $3.23. Full year and fourth quarter earnings per share reflect net tax benefits of $0.13 per share or $3.7 million resulting from enactment of the Tax Cuts and Jobs Act of December 2017, primarily from the reduction in deferred income tax liabilities.

Included in our 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 as well as fourth quarter restructuring-related costs. A reconciliation of adjustments is included in our press release.

With regard to our balance sheet and cash flow and our approach to capital allocation, we're committed to shareholder return initiatives, while funding organic and acquisition growth and investing for productivity. We believe Apogee has the cash flow characteristics to support all of these objectives. Related to acquisition specifically, our clear focus now is on integration of EFCO and recognizing the margin opportunities that we have there.

We still look at opportunities, but in the near term, our focus is on the EFCO business. For fiscal 2018 and the balance sheet, our full year operating cash flow was $127 million and free cash flow for the year was $74 million. We continue to have strong working capital management discipline. Full year capital spending of $53 million was focused on productivity and capability investments, primarily for Architectural Glass for new products and automation to continue to improve our cost structure. Apogee's cash dividend was increased 12.5% in the fourth quarter, and the company paid dividends of $16.4 million in fiscal 2018.

During fiscal 2018, Apogee repurchased approximately 700,000 shares of our common stock, which we believe was a good investment to create value. The tax rate for fiscal 2018 was 27.7% compared to 30.1% in the prior year. Both years included onetime discrete benefits with the current year, also including tax reform benefit. Debt at year-end was $216 million. Net interest expense for the year was $5 million compared to 0 in fiscal 2017 due to the increase in debt to support our recent acquisition.

Turning to the fourth quarter's segment results. Architectural Framing Systems segment revenues were up 51% in the fourth quarter. Excluding acquisitions, revenues in the quarter were down 4% compared to a strong prior year period due to year-on-year project timing differences. The year-on-year adjusted operating margin for the Framing System segment was 10.3% versus 12%. Triple-digit basis point increases in operating margins from legacy businesses were offset by the addition of EFCO, which has a lower operating margin profile currently. As Joe discussed, while we are behind on our previous expectations for margin improvement at EFCO, we continue to see a path to double-digit operating margins for this business.

As detailed in our press release, Architectural Framing segment backlog grew $27 million sequentially, excluding the EFCO backlog that was transferred during the quarter to Architectural Services. At the end of the fourth quarter, Architectural Framing backlog was $405.7 million. The project pipeline and bidding activity for this segment remain strong. Fourth quarter Architectural Services revenues increased 3% in the quarter. We came into the year knowing that project timing had a good deal of work that had moved to flow later in fiscal 2018 and in fiscal 2019.

In the fourth quarter, we started to see these projects generate revenue. Operating income grew 52% and operating margin was 9.3% in the quarter due to improved operating performance, mix of project maturity and lower insurance cost on slightly higher volume. We're pleased with the significant improvement in operating results, but this segment has quarter-to-quarter margin volatility just based on project mix and volume. So we don't see a 9% plus operating run rate yet.

Architectural Services had sequential backlog growth of $10 million, excluding the backlog transfer from Architectural Framing. Fourth quarter backlog was up significantly at $426.3 million. Bidding activity remains strong for projects expected to revenue into fiscal 2021. We manage this business around project management capacity for execution rather than to drive growth.

Looking forward, we may not see, and don't need to see, continued sequential growth in backlog. As we recognize revenue on the workbook, we look to replace it with new orders, but this segment has lumpy new order timing, resulting in quarter-to-quarter fluctuations in backlog levels.

Architectural Glass fourth quarter revenues declined to 18% compared to a very strong prior year fourth quarter. The Architectural Glass operating margin was 4.4% compared to 12.3% in the prior year period Unreduced volume, lower market pricing and mix on less complex products and cost for closure of the Utah facility, partially offset by productivity gains. The adjusted operating margin was 7.7%. The shutdown of the Utah facility was efficient, and it came in at slightly lower cost than originally anticipated. Our team worked hard to facilitate reemployment efforts for our workers, and are happy that more than half of the employee based had new jobs by the time of the closure with good progress being made for remaining employees.

Finally, although, the Large-Scale Optical segments revenues were down slightly on timing of orders from national retailers, operating income was up slightly and operating margin was 29.8% versus 26% on improved mix and cost management. Backlog mix, across the 3 architectural segments, reflect strong activity in the office sector and multi-family residential sectors, each had almost 40% of the overall work in backlog.

Institutional, which is government, education and health care, is 15% to 20% of backlog, and less than 5% of the backlog is for projects in the hotel, entertainment and the transportation sector. The mix of multi-family projects increased, driven primarily by a few larger high-end projects, many with multi-use characteristics.

The tax rate for the quarter was 14.8% compared to 21.9% in the prior-year period. I'll turn now to our outlook for fiscal 2019. We continue to feel good about Apogee's future, and we expect topline and operating income growth in fiscal 2019.

We expect 10% revenue growth, driven by growth in our Architectural Framing and Architectural Services segments. Our fiscal 2019 growth outlook by segment is for Architectural Framing is expected to be up approximately 10%, with continued share, geographic and new product gains in our legacy businesses. Architectural Services are expected to be up 30% compared to a low fiscal 2017 base. Large-Scale Optical up in the single-digits as new market initiatives begin to bear fruit. And Architectural Glass is expected to be flat to up slightly. Our outlook is for an operating margin range of 8.8% to 9.3%, up from 8.6% in fiscal 2018.

The outlook for adjusted operating margin is 9.1% to 9.6% compared to the adjusted operating margin of 10% in the prior year. By segment, we are expecting an improving operating margin at Architectural Glass to almost 10%. A triple-basis-point margin improvement in Architectural Services to almost 6.5%.

The Architectural Framing Systems operating margin will decline to approximately 8% with improved margins for the legacy group of businesses, offset by the full year impact of EFCO in the margin profile. And we expect close to a 25% operating margin in Large-Scale Optical.

We have come off our previous expectation for a 100 basis point overall margin improvement for fiscal 2019, primarily driven by the lower expectations for EFCO in fiscal 2019.

As Joe indicated, we're expecting breakeven at EFCO in fiscal 2019 to the lower volume and delays to achieve operational improvement. As we previously stated, EFCO has had a low starting point, as we had a longer journey to margin improvement. We remain optimistic about the longer-term opportunities for this business and its contributions to Apogee.

We're making good progress against synergies we have identified that Joe laid out. Through these initiatives to date we have identified and have planned for more than $5 million in annual savings that will begin to flow through later in fiscal 2019 and going forward.

In terms of overall timing expectations for fiscal 2019, we expect the second half to be stronger than the first half. We don't provide quarterly guidance, but based on visibility that we have from the projects schedules that we service, I wanted to give some visibility that the first quarter will be down significantly year-over-year for Architectural Glass. And therefore, most of the Architectural Framing Systems growth in the first quarter will be from inclusion of EFCO, which is at lower margin. So these factors are expected to drive lower margins in the first quarter.

Again, based on our visibility, the schedules pick up nicely in the second quarter for these segments, and overall revenues are fairly balanced starting in the second quarter over the rest of the year with growth every quarter.

Earnings per diluted share are expected to range from $3.30 to $3.50, with adjusted earnings per share of $3.43 to $3.63. Fiscal 2019 capital expenditures for productivity, capabilities and capacity are expected to be $60 million to $65 million. We anticipate that our fiscal 2019 tax rate will be approximately 24%.

I'd like to underscore, it is not our plan to give up tax cash savings by lowering our margin requirements. That noted, however, most of our U.S. competitors are not public companies, we can't be assured that they will have the same discipline, which we'll monitor. For fiscal 2019, we expect depreciation and amortization of approximately $55 million.

I'd like to briefly comment on some recent inflation pressures affecting our industry. We're seeing trade policy uncertainty affecting aluminum and we're seeing cost increases in freight and lumber. Our outlook covers current cost estimates for these items. And we're able to forward purchase the majority of the aluminum that we use. We monitor these costs and projections, and continually adjust our bid pricing where possible. For shorter lead-time businesses, we are focused on raising prices to offset additional -- any additional increases. And we recently seen the industry respond rationally as well. The risk that we have is that competitors won't continue to offset these inflationary items with pricing. We continue to expect sustained growth for Apogee based on our internal visibility for 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.

I'll turn the call back to Joe for closing comments.

Thanks, Jim. Before I take your questions, I'd like to reiterate my positive view of the longer-term outlook for Apogee, that is in no small part, a result of the transformation as a company over the last half decade plus. 7 years ago, Apogee was less than $600 million in revenues and Glass was 40% of Apogee. And a dominant percent of Glass was tall towers. And hence approximately 1/3 of Apogee was tied in most volatile segment with a nonresidential construction. When the end markets crashed, so did we, no surprise. And we chased limited work with price, a mistake we'll never make again.

We had weak operations, excellent processes and no lean strategies in place. We embarked on an effort to completely reprofile Apogee. To focus on more fragmented and higher margin Architectural Framing System segment, where we were underserved. To focus our acquisitions in this segment, to gain share, improve our cost structure and build our retrofit selling model and staff it. None of this was at the expense of investing for capability and productivity in our other segments.

Today, Framing Systems is more than 50% of Apogee with triple-digit operating margin improvement since this journey began. We're tripling the operating margin actually. Our acquisitions are smart ones, and while inorganic growth comes with challenges, the opportunities are huge, and the Framing Systems runway is significant. At that time, our Glass business was not pricing to the technologies we provided. We immediately addressed pricing and began long overdue investments in our factories. As the largest Glass fabricator in the United States, we were not acting like it.

As we had a massive foreign exchange hurdle thrown at us, we lost substantial share in our traditional core markets as well as losing our export base. In spite of this, we rose to a 60-year historical high in revenue, earnings and operating margin in F '17, both in Glass and Apogee. We did this by our factory productivity investments and equally massive share shift in the mid-market segment. And let me be clear, those margins were similar or better than the large segment margin as the Glass selections are of similar complexity. At the same time, we funded investments in all major factory processes to allow us to launch new coatings in oversized Glass, margin accretive products.

In fiscal 2018, we felt the full revenue brunt of the awards lost international players, and we moved further downstream where projects have less value-added attributes to the Glass. A mix of lower price and margin product. Still good business, but impacting our operating margin in this segment last year. Our investments in this Glass business will help further reduce our cost structure going forward. By the way, our dependence on large projects is now far less at Glass and a mere fraction of what it was at Apogee just 7 years ago.

I'm also pleased to admit that with the current currency situation, we are now experiencing improvement in bidding and awards and many customers have come back to work with us. I can also assure you that not all the international competitors perform like our Viracon business, with regards to on-time delivery and quality.

Our Services segment business is admittedly the lumpiest we have. It's nearly impossible to book awards in a construction world to allow for perfect project-to-project timing. We like having a seat at the construction site. Our installed business is one of the best out there, and we had a national footprint executed locally and our ROIs are substantial. Our stated strategy for over 5 years has been to smartly manage the order profile of this business to let our project management capability and capacity drive the bid process and to not outgrow our ability to improve margins or execute projects well.

Fiscal 2019 will highlight the soundness of this position. And lastly, our Large-Scale Optical business has been a gem and will remain so. We made one of our large investments for that business, small for Apogee to ensure this golden goose keeps delivering and grow. And again, you'll see the proof of those investments in fiscal 2019.

This is not your father's Apogee. Tikia, I'd like to open up the call for questions now.

(Operator Instructions) Our first question comes from the line of Sam Eisner with Goldman Sachs.

Can we just start out with EFCO? Obviously, the guidance for -- and I want to make sure I got this right, I think breakeven for EFCO in fiscal '19 -- kind of, when you guys are now in the business, what's going on. Maybe you can just give us some greater clarity and color on why, I guess, profit expectations are not, kind of, matching up to what was originally thought?

Sam, primarily the large projects they embarked on a couple of years prior to or during the -- couple of years before they divested the company. They got out from their skis and areas that they weren't familiar with on large curtain wall projects. They -- hindsight, underestimated the cost and execution complexities of that. As we've gotten more involved in the business in the second half of calendar year 2017, we realized that the problems were more substantial than we learned in due diligence, that's our fault. The -- we put the resources in place as these projects revenue, throughout fiscal 2019, we're going to feel the force of a lot of no-margin work. The most complex work we have moved to our Services segment to execute, and we feel good about that. And we put resources into EFCO to help them migrate to the kind of business they should be. And to have them focus on what they've always been good at, which is window work. And as I mentioned in my comments, I put a new President in, he's been one of our named executive officers at Apogee and running our operational program. He is just what the doctor ordered, and I like the turnaround I'm seeing. You heard it before, but Sam, I feel we've uncovered all the surprises. And I'm confident now from a new starting point, our journey can begin. I think the work -- we've seen a real uptick in work in last few months. And there has -- there's definitely a downward slope to their order -- their inbound order work. These large projects that were contributing to poor financial performance were contributing to lack of attention to their core business. We've rectified that. After several months, we began to see the work return we've improved quality and delivery and continue to do so. And I'm confident that the second half of the year will be better. We'll have most of these large projects behind us after the end of fiscal '19.

Got it. And maybe going to, kind of, bridging that over to the guidance for fiscal '19. So I think the implied midpoint of your EBIT margin or operating profit margin is, let's call it, 9.3%, 9.4%. You did 10% this year, so down about 60, 70 basis points. Three months ago, you guys were saying triple-digit basis point margin expansion. So there's a swing there in a 3-month period of roughly a 160 basis points. And so I'm curious is there a way to break down what has changed in the guidance over the last 3 months? How much is related to EFCO of the 160? How much is related to inflation? How much is related to competition? If there's any kind of large buckets that you can provide us, I think, that would be super helpful.

Sam, it's Jim. The primary bucket is a change from an expectation that we're having of improving EFCO to be mid-single-digit operating margins to be in breakeven. And really, from the visibility of the initiatives that we identified, the time that's going to take for those to flow into the business and the ability to ramp that up is really the top and most important difference between that ability to get that improvement.

Understood. And then maybe if I can just sneak one more. And Jim, you mentioned a comment about inflationary environments and competition and that could be a risk. When you guys look back, and perhaps audit, what you guys have seen over the last cycle? When you see intense inflation that you guys are experiencing now across all those various cost buckets, do you see competitive dynamics? I guess why provide that commentary about the risk. I guess have you seen it in the past or is that just something that you have to highlight?

Sam, I'll start. This is Joe. First off I'd tell you right now the last 60 days the spread between our price and material cost in our shorter lead time aluminum business is actually better than a year ago. So, so far we've been able to offset. There's been a lot of movement recently, and the primary risk factor is aluminum. And the London Metal Exchange has been down, the Midwest premium has been up. There's been a lot of noise. It was somewhat de minimis the recent conversations around the Russian oligarchs really did turn a little bit more turmoil, but we've been able to continue to price to offset the inflation in our aluminum sites. It would be foolish to not highlight risk. We do not intend to turn our tax reform benefits into lower pricing, but Sam, we have a lot of competitors that aren't public companies. So that's always a risk that folks don't follow the pricing model. Jim mentioned it. There has been greater industry intelligence in addressing input cost in the form of price decision. So this has not been the historical case. It has been for the last couple of years. We feel the risk is not significant, but we felt we had to point it out. I think the trend has been pricing keeping up with it, and we built our plan around some of that happening.

And I'll just echo, one of the points that Joe made. The risk is primarily with the Framing System segment and primarily of our aluminum more so than the other factors. And as Joe said, over the last 2 years, we've seen the industry be quite disciplined in terms of pricing, and we continue to -- from what we can monitor, expect that. As Joe said, if you look historically, the industry tended to be a bit slow to adjust pricing to inflationary pressures, but our expectation would be that what we've seen the last years to continue.

And Sam, I'll add for you and the rest of the audience. Most of the aluminum we buy is from exempt countries. So when the tariffs were first announced, it was an alarm for everyone. We all expected it to be actually directed at one country, that's primarily come into fruition. The only countries in our supply chain that had not been exempted, we expect to be exempted very soon. So from the tariff perspective, we feel very limited risk. I am more concerned about the global supply. I think you're all well aware how much the United States imports. So I think that some folks will try to take advantage of the rhetoric that's going on. But the reality the matter is, the tariffs do not affect most of our supplying countries, Sam.

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

And maybe we could start on the Services. So the -- I think the target operating margin was 6.5%. Is that being impacted at all by the EFCO -- $70 million in EFCO business that's coming into Services?

Well. Yes, a little bit. So they do -- it will have a relatively small amount of revenues. Maybe 10% of their revenues are going to be at lower margins than their overall business.

Got it. If you look at the backlog, just kind of on a -- put into 2 buckets, between fiscal '19 and fiscal '20. Can you give us kind of a rough split?

In -- the -- you're talking about in terms of how much of the backlog is expected to grow fiscal '19 versus '20?

Correct.

Yes, I think about 2/3 of it is fiscal '19 and about 1/3 is fiscal '20 and beyond.

Chris, the important point that I'll add is, virtually all of fiscal 2019 plan revenues in that segment are in hand. This is the first year in a long time where we literally don't have book and bill requirements to achieve our plan in that business. It's quite de minimis. Usually, every year you enter with some blue sky where you have to win work and revenues some of it in the year. The business is, for the most part, fully revenued for fiscal '19.

So it really does bode well for that business. And in the Glass business, even though the recent quarters have been down. As Jim mentioned, second, third and fourth quarter we'll see year-over-year revenue growth. And I mentioned in my comments, that in Glass where the percentage of work we have in hand to support '20 -- the current year revenues is 25% higher than where we stood last year. So once again, we're far less dependent on book and bill in the same year in the Glass business as well.

Got you. The 25%, kind of, that's just -- this 4 or 5 levels that you've talked about overall in terms of from backlog and beyond.

Yes, we've always shied away from adding more non-GAAP metrics. But if you add the book backlog to awards, we're up at 25% over the prior year. We also have work we have verbally been given, or we feel we've won the projects going forward with somebody where it's we're the sole Glass bidder and we have work we're bidding. Those 4 levels of visibility often talked about, the first 2 are the most concrete. And that's what I'm talking about when I say we're 25% ahead of last year.

Got it. And on the Glass side, you're talking about one of the things expanding into broader Architectural Glass markets. Can you just talk about that a little bit further?

Yes, a bit more work in the interiors world where we've been underserved. There's the outside skin of the building. And then today's most modern buildings are going up. There's a lot more interior glass than years ago. Glass partition, glass railing, glass walls versus the traditional cubicles. And we believe we can have a larger share of that and be more competitive in the -- as we move downstream in the mid and smaller projects world.

And would you anticipate the margins there are relatively the same as on the outside or is it...

The margins on the interiors and versus the margins on the outside?

Yes.

Yes, I don't see there's no margin difference there. The smaller projects as you move downstream, obviously, the complexity the Glass that may only have a single silver coating may not be heat-treated. They are at a lower price point. And -- but we believe we can achieve similar margins with our continued productivity and efficiency in automation investments.

Our next question comes from the line of Eric Stine of Craig-Hallum.

So just wanted to start with Glass. I know, especially last call, you called out increased competition in midsized projects. In your commentary here, really does not discuss that at all. So I'm just curious, have you seen that ease at all or do you feel like, I mean, is that just a nod to that's going to be the current environment and you expect that to persist going forward and you factor that into your outlook?

Yes, Eric, I tried to address that today. I admit I did a poor job last quarter. I guess it came out with more price competition. And that was not true. That's today why I'm explaining that, as we move to offset the losses on our larger projects and had a substantial growth in our share in the mid-market segment, the margins were equally attractive as the large projects. And that was the case for all of F '17 and halfway into F '18. And we made the largest gain in our share in the mid-market, meaning smaller projects in fiscal '17 where we had record earnings and record operating margin. That trend continued into F '18. It's the middle of the year. We started to, kind of, hit a wall on share gain. We weren't losing any share in the mid-market, but we ran into a wall of gaining more. We were tapped into a lot of the market. So we moved downstream even further for the less complex project. It doesn't mean we had to lower our prices, but we're now playing in a world where the Glass content was less value-added. The competitors didn't necessarily lower price either, but it is a more competitive space. We continue to win share in that space, but it came at lower margins, and we ramped up our efforts to be more cost competitive to get back to the same kinds of margins in that business. Unfortunately, we continue to lose revenues in the large projects. Frankly, it was revenues that were lost to the awards a few years earlier. But that trend has turned around. So we feel good. So Eric, I hope I explained it better today with regards to -- it wasn't so much more competition as us continuing to step down, streaming to less complex projects.

No, that's perfect. That makes a lot of sense. I mean just taking there, obviously -- well in the past in terms of the euro you've talked about, 120 is kind of being a key level. And I know it's fairly recent. The situation now -- so you're starting to see some regaining of share there. Is that something that you feel like has some legs?

I do. Some of the largest installers in the country were the first to try to save $1 by going offshore. Offshore fatigue definitely set in. We have great competitors around the world. A long logistic supply chain on 1% of the construction cost of the building is a very risky model, and it comes with unanticipated cost downside that aren't easily attributed back to the Glass per se. But as our valued customers experienced all the intricacies of that long logistic supply chain, they started coming back to us, frankly even before the currency moved to our favor. So the same people that didn't give us work for a few years, had been bidding with us again and awarding us work. And we've won some projects against international players recently where we just couldn't be competitive at $1.05 per euro just 2.5 years ago. So yes, you feel that there are legs on this, but we're running our business model to not be dependent on things beyond our control like currencies, and hence our continued investments in our -- to bring our cost structure down in our Glass factories.

Yes, okay. Understood. Last question for me just on Framing. I know you're talking about expanding that -- well, from a product perspective also geographic perspective. I mean, how do you -- as we think about that going forward, how do you see that breaking down organically versus by acquisition?

Yes, let me be clear. We're not looking to do acquisitions. Our focus is on EFCO. Our focus is on improving all of our businesses. Jim and I will continue to keep our eyes out there. We'll keep irons in the fire. But there we will not be looking at inorganic growth in our Framing Systems business for the foreseeable future. I'm not going to tip hands to my competitors where we're going. But let me just say we have a lot of runway in the United States with geographic opportunities in Framing Systems as well as in Canada.

[Operator Instruction] Our next question comes from the line of Brent Thielman with D.A. Davidson.

Maybe on the Glass side, Joe. Do you still expect to grow in the midsized market in fiscal '19 or is that going to take a backseat kind of a top line headwind as you shift more towards kind of large project?

No, no. We have the capacity to grow. We expect to continue to see upward movement in the midsized segment. We don't feel that we are tapped out. And frankly, if you're going back to the last downturn which don't ever expect to see prices like that, but our Glass business Viracon tried, because the large projects exasperated. There was one large product in the United States back then and it was World Trade Center. Our business, the company tried to penetrate that market and failed miserably because they didn't have the operational footprint to deliver in 4 weeks to 5 weeks that, that segment requires.

Our DNA was 15-week lead times for large projects. Today, and for the last several years, we've virtually shipped every single order in 5 weeks today consistently, because we put the automation in place. And some of you have visited our factories, you have, there's a lot more automation and less material handling. And it's become our core model. So we're capable of competing in that market. We're also capable of continuing to fix our cost structure so that our margins can continue to be at the high levels they've been.

And just to emphasize, Brent. Along those lines which is with the improvements that we've made in the operating model in that business, it isn't a poor situation of large projects or midsized or adjacencies. We really have the capabilities and continue to work on the cost structure to do all of those.

Okay. And then the order activity you're seeing in large project. Is it back at through the pricing or margin levels you'd expect from this? The sorts of job you were seeing at least a few years ago?

Yes, the bidding activity is at good margins. There's nothing gone. We haven't seen any downward track in pricing or margin. I would tell you I think in the large project, the term I would use is the end markets continue to bump along the top. There's no question the large prices are up there. I do not believe they are peaking. I think we're going to continue to bump along the top for the foreseeable future.

I think the mid, small, upper mid-market will continue to grow on a reasonably small slope, but they will grow. But I think the large projects -- I feel good that the -- that will continue to bump along this high level of work in the large projects for the foreseeable future. And what doesn't always get captured in nonresidential is the continued strength in the multi-family high-rise buildings which for all intent and purpose is nonresi from our workload. Apartments and condos which we have a much bigger play in now with our business model as we continue to see the generation of new homebuyers moving into cities instead of the countryside. This bodes well for our company frankly. And we're seeing that trend help to offset any other potential downturn. So I see us bumping along the top for some time in large projects and continued growth in the mid and small projects.

Okay. On EFCO, Joe, I mean, obviously the transaction hasn't played out as you initially planned and now we're -- I mean, it seems to me we're looking at additional delays and kind of given to the targeted margin. So I guess I'm looking for any sort of additional color that you've got that sort of helps us feel like the risk is appropriately reflected here.

I feel the risk is appropriately reflected here for EFCO. We definitely were -- had more surprises than we wanted and that you expected. That's on us. We have said it today, we believe we've now identified everything that we could with the business. It was a challenge. I've got a new leader down there who's doing a phenomenal job. I'll be with the entire selling organization of EFCO tonight and tomorrow. And like I said, I'm pleased with the turnaround in order profile. We've got the right leaders in place. We have taken the problems and put them in the hands of talented people in our company that have been managing large massive projects for a long time. They got out in front of their skis. We didn't pick up how far out they were. We now know. I believe we are -- our F '19 guidance reflects the full risk that, that business had.

Brent, I'll just give you a couple of perspectives. I mean, since we employed our current leader down there, a little over 60 days ago. Some of the learnings, for example, we've talked about low-hanging fruit and procurement. And we've got meaningful savings identified. What we underestimated was, in some cases, maybe a spec change needed to be made to be able to flow that material in or finishing an existing project that have been started. So delay in terms of being able to see those. And some of that process improvements on the shop floor. We identified some modest cost equipment that was needed. We placed orders for equipment and those types of things. So we have a tangible great lift of initiative. As I articulated, it's just going to be put into place later than we were earlier anticipating.

Okay. And lastly and somewhat of a follow-on to that. I think if you go back over time and I think about your guys' guidance practices and trying to be transparent where you want to be from a financial perspective. You have done a great job. I think it's easy for folks to kind of, look at recent history of guidance and be a bit skeptical about what you're talking about today. So I guess a 2-part question. The one, have you changed any processes in terms of how you're approaching and thinking about guidance? And two, quite frankly, I mean sub-5% EBIT growth at least on an adjusted basis seems pretty conservative to me. I mean, can you comment on that at least?

I'll comment on it, Brent. It's -- we put -- we're not going to get out in front of our skis. I believe we've got a plan that we will hit. And I can assure you we will continue to work our backside loss to not disappoint. And I'm not going to through another fiscal 2018.

We always look at our risk and opportunities in the business as we come up with our outlook. And I think we're taking a probably letting the risk-aspect approach guidance a little bit more.

Thank you. Ladies and gentlemen, this concludes today's question-and-answer session. I would like to turn the conference back over to Joe Puishys for closing remarks.

Yes, Tikia, thank you. And I apologize, if you were in the queue to ask a question, I will not ignore you. Please reach out to Mary Ann, Jim or myself. You know how to reach us. We will talk to you. I apologize, a lot of questions today. And I certainly talked a lot more than normal, so I'm going to wrap up now and just tell you, we look forward to a very solid year. I hope you all -- you've got our message across more clearly today, and now we'll talk you all soon. Thank you very much.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes today's program. You may now disconnect. Everyone, have a great day.