Apogee Enterprises Inc (APOG) 2019 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Apogee Enterprises fiscal 2019 first-quarter earnings conference call. (Operator Instructions). As a reminder, this conference call may be recorded.

I would now like to introduce your host for today's conference, Ms. Carrie Schweyen. Ma'am, you may begin.

Thank you, Daniel. Good morning and welcome to the Apogee Enterprises fiscal 2019 first-quarter conference call on Thursday, June 28, 2018. I'd like to begin by reminding everyone that there are slides to accompany today's remarks, which are available online. To access them, simply go to the Apogee Investor Relations website at IR.apog.com, then click on the link for this webcast under upcoming events.

With us on the call today are Joe Puishys, CEO; and Jim Porter, CFO. Their remarks will focus on our fiscal 2019 first-quarter results and our outlook for the full fiscal year. Once they conclude, they will take questions.

Turning to slide 2. During the call and on the accompanying slides, we will discuss non-GAAP financial measures when talking about Apogee's performance. You can find definitions for these non-GAAP financial measures in our press release. We have 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 Apogee's business and financial results can be found in our SEC filings.

Turning to slide 3, and I'll now pass the call over to Joe.

Okay. Thanks, Carrie, and good morning, everyone. Apogee delivered a solid start to fiscal 2019 in the first quarter. I'm very proud that our teams drove operational excellence and growth across the Company. And we delivered on our strategy to create long-term shareholder value. Revenues were up substantially and backlog continued to grow across all of the businesses, which should support growth throughout the rest of this year into fiscal 2020 and fiscal 2021.

We saw ongoing productivity gains, operational improvements, and tight financial management, including excellent cash conversion. Based on these results, and a strong outlook, we've raised our outlook for the full-year guidance by $0.05 per share, as well as our margin goals, and re-affirmed our expectation of 10% top-line growth.

Before diving into the progress of the first quarter, I'd like to provide some background on the progress we've made over the past seven years building a stronger, more diversified Apogee.

If you look at slide 4 from our investor deck, it shows from fiscal 2011 to fiscal 2018 we delivered consistent year-over-year revenue growth every year in spite of the variability of our end markets. This highlights the strength of our diversification. The chart also illustrates how we successfully transformed the business following our strategic decision to drive outsized growth in the Framing Systems business where we enjoy a strong competitive position and high margins. And this did not come at the expense of our other segments.

A key driver of growth across each of these segments has been our successful efforts to increase penetration and share, extending into new geographies and new market sectors, and to launch new products. Underlying the revenue growth you'll see on this chart, we've successively grown our backlogs, our profits, and our pipelines across each of the businesses to record levels.

If you turn to slide 5, again reviewing why Apogee's first-quarter results illustrate substantial progress we're making in driving long-term shareholder value. I'll start by emphasizing how we continue to build a stronger, more diversified, and more stable platform for long-term growth. In Q1, our revenues grew 24% across a more diverse footprint than Apogee had one year ago.

In the quarter, Architectural Framing Systems continued to lead the Company's growth in diversification, with revenue up 62% as we pursue geographic extensions, opened a new location, introduced new products, both from recent acquisitions and existing businesses. Our competitive position in the Northeast and Southern US, along with Western US and Canada, has increased. We have added several products, including some that expand our presence in the education sector, and others that extend our offering to high-end multifamily projects.

EFCO, which we acquired in June of 2017, contributed a large share of our Framing Systems revenue growth and diversification in the quarter. EFCO also supported diversification across the Company by creating new opportunities for other businesses in terms of geography, product, and size. Our legacy Framing Systems businesses, those that've been running under our playbook for the past five-plus years, also contributed strong double-digit organic growth and share gains last quarter. This demonstrates the deep expertise and strong competitive position we've staked out for our Framing Systems businesses.

We continue to have success maintaining a premium differentiation in terms of product quality, service, and lead times, even as we grow quickly. Across Framing Systems, segment backlogs increased substantially last quarter, up 67% from a year ago, and more than 5% sequentially. This came from bidding, winning, and contracting successes. We expect this strong pipeline will support continued growth in this segment next year, and well into fiscal 2021.

Architectural Services were up 40%, continuing and contributing to last quarter's revenue growth. As we've discussed, services is a lumpy business, largely as a result of the dynamics of the construction industry. However, we continue optimizing our project selection process according to our project management capabilities and capacities to smooth the peaks and valleys in this segment. We have also expanded our geographic footprint in this business. We made good progress growing the services backlog, which was up more than 50% from a year ago, and 3% sequentially. Fiscal 2019 is now fully booked for the services business. And fiscal 2020 is booking up, well ahead of where we were a year ago looking at fiscal 2019.

The Architectural Glass segment was the only segment to decline in the quarter but this was as expected, and purely due to timing of project work. Importantly, this business is in very solid competitive shape. Order activity was very strong, especially toward the end of the quarter, and we continue to win in the midsize market and regain large project work.

We now have the majority of fiscal 2019 revenues in hand as firm awards, significantly further ahead than where we were for the same metric a year ago. This gives us confidence that the glass business will grow in the remainder of the year. The second quarter will reflect strong sequential growth in glass, and Q3 and Q4 will reflect solid year-over-year growth.

The Large-Scale Optical business grew organically by double digits last quarter, largely from initiatives we've made to enter new display markets. We guided to growth in this segment this year, and this is a terrific start. Across Apogee, in addition to recent acquisitions, we made other internal investments to enter new markets in order to drive organic growth and diversification.

For example, we expanded our retrofit initiative last year to help better penetrate the substantial US market of older buildings needing aesthetic and energy-efficient upgrades. We have added to our teams that call directly on building owners, developers, and property managers, as well as energy service companies. Progress is very good, and we're confident in hitting our target of $50 million in new orders this year from this initiative.

As detailed on slide 6, the last quarter we also made progress improving productivity, leveraging operational excellence, and reducing costs to expand margins and accelerate long-term earnings growth. In Q1, the EFCO acquisition contributed significant revenues at just above breakeven. This was, in fact, better than we expected. But it still impacted the margins by 400 basis points in Framing Systems on the year-over-year comp and by over 200 basis points Company-wide, as expected.

We said previously and continue to believe strongly that EFCO has all the upside of our legacy framing businesses. It has the same basic model and delivers similar types of products. It's a perfect fit for Apogee. And we're confident that over the next three-plus years, it can reach the same level of double-digit performance and operating margins as the other divisions in the Framing Systems segment achieved today.

From that perspective, we see EFCO as potential 200 basis point margin opportunity for Apogee. This confidence comes from our track record of improving margins across Framing Systems. We have developed a disciplined playbook of reliable, repeatable business practices; smart project selection; pricing excellence; lean; and automation.

In the last seven years this approach has allowed us to more than double revenues organically, and triple operating margins in our traditional businesses, much of that coming before we had any help from the end markets. This progress continues, in fact, and we saw triple-digit basis point margin improvements in the last quarter in our legacy businesses as well as strong top-line growth that I mentioned earlier.

Coming back to EFCO, we have already seen very good progress with quarter-over-quarter improvements in productivity and profits. We've begun capturing purchasing savings, leveraging our supplier relationships, and driving better on-time deliveries, improving further and we're moving forward with our synergy goals. We have ordered machining automation equipment and approved a plant improvement project to drive significant operational efficiencies, beginning early in fiscal 2020. This hard work has also resulted in a significant upwards trend in customer orders this year.

In February, I appointed a new President of EFCO, John Klein, who previously was Apogee's Senior Vice President of Operations and one of my core business partners at Apogee for the last five years. Under John's leadership, the EFCO team is now leveraging Apogee's deep project management skills to work through EFCO's challenging project pipeline that we inherited, and had impacted the businesses' margins.

To repeat, I remain very optimistic about the margin opportunity at EFCO and Framing Systems overall, in addition to their positive impact on our top line, which we are already seeing.

Another observation I'd like to make about first-quarter operating margin is we continue making targeted investments in productivity initiatives across the Company to drive sustainable margin improvements. For example, in Architectural Glass last quarter, we made further investments in the automation of material movement. In Framing Systems, we introduced automated machinings at multiple business units and multiple factories. In total, we are on track to achieve over 2% net productivity improvement at our factories this year.

In Architectural Services, where revenues rose sharply, operating margins and income increased substantially, as strong variable margins flowed through. Revenues were up over 40% with over 500 basis points of operating margin expansion versus the same quarter a year ago. During fiscal 2018, we said repeatedly that we were maintaining the key engineering and project management talent that we would need to execute on the massive backlog increase we were seeing. We are now leveraging the volume on these resources.

In Architectural Glass, and the Sotawall division of Framing Systems, revenues declined, both as expected, and as anticipated operating margins and incomes also decreased. On the upside, operating leverage is clearly positive for these businesses since strong operating leverage will help drive margin expansion as we continue to grow and scale these businesses.

Currently, both of these businesses are experiencing significant strength in orders. In glass, we've begun to see wins in the large project segment again. In Sotawall, after a one-year lull in orders in the Northeast, we're now seeing robust award activity which bodes well for fiscal 2020 and beyond for Sotawall.

We're also taking steps to manage any potential downside as well. We're utilizing our strong visibility around project volumes to flex fixed costs whenever possible. As I said, we are improving our project selection and scheduling processes, including applying best practices and margin -- I'm sorry, and expertise across the businesses to smooth out the natural lumpiness in these businesses.

My last comment on margins is about Large-Scale Optical Technologies. This is a gem of a business that achieved 24% operating margins last quarter as revenues rose 12%. It delivered $5 million in operating income in the quarter, and $22 million last fiscal year. It is a steady and solid foundation for our Company for both margins and earnings. The business leverages the same coating technology we use in Architectural Glass as it manufactures repetitive but very high-value-added products, allowing very high efficiency and yields.

Moving to slide 7, in the first quarter, we continued to carefully manage cash to reinvest in the business, maintain a strong balance sheet, and return capital to our shareholders. Free cash flow, which we define as cash flow from operations, less CapEx, was $16 million in the quarter. This was on par with our net income, showing solid cash conversion from rigorous working capital management; especially rigorous, in fact, given the strong revenue growth and the careful investment in productivity initiatives that I mentioned.

Our balance sheet remains strong. Debt was $215 million at the end of the quarter, in line with one quarter ago, and our debt to EBITDA ratio is 1.3. We believe the strong balance sheet is essential to preserving and creating shareholder value because it lowers the Company's long-term risk profile, and it increases its long-term strategic optionality on the upside.

Our other priority for cash, in addition to reinvestment, is our shareholders. One channel is the dividend, which we increased 12.5% in January for a total increase of 43% over the last three years. Last quarter, we paid a dividend of $4.4 million; and just since fiscal 2016, we paid $49 million in dividends.

We also have an open share repurchases plan to return capital to our shareholders. Though we did not purchase shares in the quarter, we remain committed to buying shares back, as evidenced by the fact that since 2016 or fiscal 2016, we have purchased over 1.5 million shares, returning $70 million to shareholders on top of the $49 million in dividends in just three years.

Lastly, about M&A. We believe we have a robust process for looking at a pipeline of potential acquisitions. However, at this moment, our focus is totally on integrating our last two significant acquisitions, Sotawall and EFCO. And we do not plan to make additional acquisitions at this time. Of course, we continually evaluate this going forward.

Now if you flip to slide 8, I'd like to pass the call over to Jim who will address the consolidated segment operating results, balance sheet, and cash flow. And at the end of the call, I'll come back and take your questions.

Jim?

Thanks, Joe, and good morning. I'll cover the first-quarter results and the outlook. Turning to slide 9 for our consolidated first-quarter results. As Joe has described, we are pleased with solid results for the first quarter. Consolidated revenues were up 24% over the prior-year period, driven by acquisition-related and organic growth in Architectural Framing Systems, and growth in Architectural Services as well as in Large-Scale Optical. This was partly offset by an expected timing-related decline in Architectural Glass. As anticipated on an organic basis, excluding the EFCO acquisition, revenues were comparable year-over-year.

Gross margins were 24% in the first quarter versus 25.8% a year ago, due to the inclusion of the currently lower-margin EFCO business and deleveraging in Architectural Glass and at Sotawall. Our SG&A increased to 17.5% of sales from 17% in the prior-year period, largely with the inclusion of EFCO, but also with higher overall selling expense.

Operating income declined to $22 million as a result of lower timing-related sales and operating leverage in Architectural Glass, partly offset by good results from Architectural Services. Adjusted operating income was $24.9 million. In the current year, adjustments are only adjusting for amortization on short-lived acquired backlog at Sotawall and EFCO.

Interest expense of $1.9 million compared to $400,000 in the prior-year period due to debt used for acquisition. Offsetting the interest expense impact on earnings was a lower tax rate at 24.1% compared to 32.9% a year ago, reflecting benefits from the Tax Cuts and Jobs Act. Earnings per share were $0.54 versus $0.56 in the prior-year period. Adjusted earnings per share were $0.62, even with the prior-year period.

Turning now to segment results which are on slide 10. In Framing Systems, revenues were up 62% from a year ago, reflecting sales from EFCO, which we acquired a year ago, June; and solid growth in those businesses that we have owned for over two years. This was partly offset by a revenue decline at Sotawall, which we acquired in December 2016. The decline at Sotawall was due to project timing, as we expected coming into the year, and a difficult comparison to a strong fiscal 2018 first quarter. Segment revenue growth reflected an expanding geographic presence in North America as well as new products.

On an organic basis, excluding EFCO, segment revenues rose 3%. Operating income improved slightly in the quarter, and operating margin declined as anticipated due to the inclusion of the lower-margin EFCO sales. Lower Sotawall sales also impacted margins due to the business's operating leverage, though this was somewhat offset by ongoing sustainable margin improvements in the Framing Systems segment's remaining businesses. As Joe described, segment backlog increased to $427 million from $406 million a quarter ago, and the project pipeline and bidding continue to be solid.

In Architectural Glass, revenues declined approximately 20% from a year ago, largely as expected on soft volumes early in the quarter based on the timing for customer orders. We had this visibility coming into the year, as we had previously discussed. Operating income and margins also were down as a result of the lower volume. As Joe pointed out, order activity for Architectural Glass grew substantially during the quarter. And we continue to expect higher revenue sequentially in Q2, and year-over-year revenue and operating income growth for the remainder of the year.

In Architectural Services, revenues grew 41% versus the prior year as we executed on the substantial backlog booked over the past year, as we had expected, and against easier prior-year comparison. Operating income and margins were also up significantly due to volume leverage, strong operating performance, and project mix. Segment backlog increased relative to a quarter and a year ago, and the outlook for the remainder of fiscal 2019 remains positive.

In Large-Scale Optical, revenues also rose by double digits on strong core picture framing demand, product mix, and growth in new markets. Operating income was up further, and margins were 24%, driven by volume leverage and favorable product mix. We continue to have a positive outlook for the remainder of the year, in line with our plan.

Moving to slide 11. Year-to-date capital expenditures, primarily to improve productivity and capabilities, were $9.3 million. Free cash flow in the first quarter was $16 million versus free cash usage of $5.5 million in the prior-year period, primarily reflecting strong working capital management and lower capital expenditures. During the quarter, we paid a dividend of $4.4 million, as Joe noted.

Lastly, I'll turn to our updated fiscal 2019 guidance, which is on slide 12. As we announced in this morning's press release, we're raising full-year earnings per share guidance ranges by $0.05 along with margin guidance. This is based on solid first-quarter performance and an improved margin outlook for the year, largely at Architectural Services. We continue to forecast approximately 10% top-line growth for the year based on solid organic growth across the businesses for the remainder of the year in addition to our first-quarter gains.

Our expectations for segment-by-segment revenues for the full year are in line with what we described last quarter. Framing Systems is expected to be up for the year approximately 10%, with the third quarter expected to be the strongest quarter for this segment. Architectural Glass should be flat to slightly up for the full year. We expect revenues to be up 15% to 20% sequentially in the second quarter with modest year-over-year growth in the third and fourth quarters. Architectural Services revenues will be up around 30% for the year. Based on the visibility of our project schedules, the first half is expected to be stronger than the second half of the year. And Large-Scale Optical should continue to look at growth in mid-single digits for the year.

We've raised our outlook for operating margin to a range of 8.9% to 9.4%, and for adjusted operating margin to 9.2% to 9.7%, in line with our increased earnings guidance. Segment by segment, this higher guidance corresponds to a slightly higher outlook for full-year margins in Architectural Services, up from almost 6.5% to, now, an outlook of 6.5% to 7%.

Our outlook for full-year operating margins in the other segments remains consistent with last quarter's outlook. We expect solid sequential improvements quarter over quarter, with full-year reported operating margins in Architectural Framing Systems at approximately 8%; Architectural Glass approaching 10%; and Large-Scale Optical, almost 25%. We continue to forecast our tax rate will be approximately 24%.

Earnings per diluted share are expected to range from $3.35 to $3.55, and adjusted EPS of $3.48 to $3.68. For fiscal 2019 capital expenditures for productivity capabilities and capacity continue to be expected at $60 million to $65 million, and we expect depreciation and amortization for the year of approximately $55 million.

Now I'll turn the call back over to Joe to conclude with some final comments on the outlook.

All right. Thanks, Jim. I want to remind everyone that our visibility, which is critical to our forecast here, goes well beyond our nearly $1 billion in booked backlog. It also includes awards that are not yet in backlog. It includes commitments and wins, bidding activity, and architectural calls. All of these indicators continue to be very positive and support an outlook for at least two-plus years of end market growth.

Industry fundamentals also remain encouraging. We're seeing favorable lending in the non-resi construction market. Office vacancy rates remain stable and relatively low. And job growth continues in the office-occupying sectors: education, healthcare, and hospitality, which are all vitally important to Apogee.

Furthermore, the Architectural Billing Index continues to reflect solid growth in all US regions and sectors, in particular the office and institutional building segments, both of which are core markets for Apogee. As we reported in this first-quarter press release and earnings call this morning, fiscal 2019 is off to a very strong start, sustaining last year's momentum.

I'm proud that our teams drove operational excellence and growth across the Company, and we delivered on our strategy to create long-term shareholder value. Revenues were up substantially. Order activity was strong. The backlog continued to grow across the businesses. And the outlook for North American construction industry is robust. All these factors should support growth throughout the rest of this year, into fiscal 2020, and beyond.

And with that, I'd like to ask you, Daniel, our operator, to open the call up for questions. Thank you.

(Operator Instructions). Chris Moore, CJS Securities.

Maybe we could just walk through the EFCO -- expected EFCO margin progression from a high level in terms of -- when will most of the mispriced pipeline run off? And do you expect, for example -- will there be a big bump in EFCO margins in late 2019, sometime in 2020? Just a little bit more detail on that, if you could.

Yes, Chris, I'll start, and Jim will give you more detail on the numbers. In general, we had a couple of projects that were particularly troublesome, one of which is virtually complete; and the second one is exiting the engineering stage, and we now go into full-scale production. So I feel good about both these projects, and believe we are substantially completed through the hurdles, and the work we've been bidding on has been core to the Company. So I would say, for the most part, the problematic projects are behind us. As I mentioned, we had a little bit better than breakeven business.

I'll let Jim comment on the progression for the year, but it's upwards opportunity for us for sure.

Yes. Chris, for the current fiscal year, I think we had given some messages that the first half of the year would be a little bit negative, the second half of the year, a little positive; roughly breakeven for the year. Our first quarter was slightly better than we expected, not much. But we still expect the first half to be breakeven to slightly negative; and the second half, slightly positive; and roughly breakeven for the year, but at a trajectory of improving the margins as we work through the better work and start to see the impact of the operational initiatives.

Got it. That's very helpful. On the glass side, it sounds like the bigger buildings, you are seeing a pickup later on in fiscal 2019. Do you -- from what you see, is that going to continue into fiscal 2020?

I believe so. We still have a substantial share of large projects. I don't ever imply anything else. It's down from our traditional high share of demand. We began to see the customers have realized there are a lot of hidden costs when you deal with a long logistics supply chain for large, heavy glass. We started to see some offshore fatigue set in. And many of the customers that hadn't bought glass from us, as they chased international sources thanks to the exchange rate and strength of the dollar, have begun to come back. And we've seen this trend, I think it's just beginning, I expect to continue, and our glass people are feeling pretty comfortable seeing some share recovery in that segment. And the answer is yes, I see it continuing into F20 and beyond.

Got it, okay. Last question for me, Joe. You talked a little bit on the specifics behind the CapEx. So, that $60 million to $65 million for fiscal 2019, that's going to be split between framing and glass? You talked about a little bit more being spent on framing perhaps than historically.

Yes, it's across all the businesses. The Framing Systems will be a little higher than it has been because of our investments in productivity. This project I referred to at EFCO to improve their factory was something we identified even prior to the acquisition. And frankly, EFCO had been pushing their prior parent to make this investment. It wasn't happening. That spend has just begun and will continue into about April of next year when we go live with the new factory layout. So Framing Systems will be up a little bit more than normal, and glass will be more of a traditional spend.

Got it. I appreciate it. Thanks, guys.

Brent Thielman, D.A. Davidson.

Great quarter. Obviously you had a great backlog coming in with services in the first quarter, but still fairly surprised at the margin performance there. Joe, is there any particular unique projects associated with that? And I guess historically, I think you tend to build off this first quarter in terms of margins for that segment. Should that still be the expectation?

Yes, there's nothing unique about a particular project or a one-off that drove up margins. Listen, no denying it was an easy comp. We got beat up last year because of the revenue hole that was created in the order pattern from the prior year. So I certainly admit that we had a relatively easy comp. But the business has been focused on data analytics driving to better project selection, no surprises in the field and in our factories, and I expect the trend to continue to improve in the services segment going forward.

And Brent, just a comment. The services segment, just the quarter-to-quarter timing in that business is really purely a function of the projects that we're serving. And so I understand your point. Probably the last multiple years we've seen the back end of the year really being the strongest, both in revenue and the corresponding margin.

This year, again based on the timing, the work is a little bit more front-end loaded. And so the drivers of margin in that business are the combination of the volume leverage that we get, the execution on those specific projects, but also the mix of the projects that happen to be flowing through in any one quarter. So Q1 was pretty nice based on all those factors for the business.

Okay. Thanks for that. And then back on the glass business, obviously it sounds like the large project stuff is coming back nicely for you, and a portion of that being recapturing some share. Joe, what's your outlook for that particular sector of the market at its core? How far out can you see jobs? And is it a mid-single-digit growth type sector within the non-res market? Is it faster or slower than that? Any (multiple speakers)

Yes, there's no question the activity is robust: the bidding, the awards, the architectural activity, as I noted. I think mid-single-digit is the natural place that I would peg the end markets. And we talk about F20 and F21, we don't see any indicators. I mean, you can look at Dodge Data, McGraw-Hill, they all project at some point a flattening but no sharp decline. There is no indication of any downturn in this modest growth in the glass segment. And so, as far out as we can see, we see growth.

We are doing things to gain share, such as our penetration in the mid-markets. We've got other strategies that I won't get into on the call, that we believe the future of that business is robust and it's a core part of our portfolio, and will be. We talk about Framing Systems because of our goals to outsize growth there, but it is not coming at the expense of glass, which will continue to grow and improve its profits.

We weren't the only player in this industry that had a lull. I used word jiggling in place last year. There were -- call it some of the election hangover, worry about tax legislation, worry about trade and tariffs. There was a lot of activity just sitting on hold in the second half of last year. And it was frustrating because the work was out there.

And a lot of the people in our industry -- we were all at the AIA conference last week in New York -- a lot of our industry saw a slowdown in Q1, but very nice pickup in orders. I mentioned the glass orders were up substantial. We don't generally rely on backlog in that business because of our quick turn from order to delivery, but that backlog was up nicely in the quarter.

And the awards were at a higher margin than our awards a year ago for our average margin that we revenued last year. So the business is in very good position. It came off its tough quarter. It's exactly -- we guided that we'd be down 20%. We had good visibility. We didn't surprise. It's a tough optic. But Q2, as I mentioned and Jim mentioned, will see a nice improvement in the revenues over Q1. And Q3 and Q4 will show nice year-over-year growth based on our current order forecasts.

That's great. And then last one, if I could. Just it sounds like the order book is getting better at the Sotawall business. What in particular is driving that?

We knew the risk of that acquisition was a heavy reliance on orders primarily in the Northeast, New York and Boston. We really didn't see any wins in New York City throughout the entire fiscal year, last year. Similar to the issue I talked about in glass, we started to see a release of work. We won -- we got some nice awards. The backlog -- the Sotawall backlog grew more than any other business in Apogee in the quarter due to these wins. Unfortunately, it really doesn't start to kick in on the revenue till late in this fiscal year, and it bodes very well for fiscal 2020.

I think fiscal 2020 is going to have comps over fiscal 2019, kind of like you're seeing in services this year. And we've seen some wins -- we've gotten some wins in Canada as well, so we're not totally reliant on the Northeast for that business. So it's been a great business; it just dealt with a lull in New York for the whole last year, which we're feeling on revenues now. But we can absorb that within our Framing Systems performance.

Okay, great. Thank you.

Eric Stine, Craig-Hallum.

Maybe just focused on framing related to tariffs. And I know -- don't necessarily need to ask for a prediction on where all of that ends up, since there are a lot of moving parts. But maybe just -- you've had good ability to pass on those costs to your customers. However, in the past, there has been just some concern: would the rest of the market act rationally? So maybe just talk about your ability to still do that, but also what you're seeing in the market.

You did not hear us call out input costs as an issue for us. We have across our businesses been able to offset a -- quite frankly, a moving target. The London Metal Exchange on aluminum had its largest single-day drop the same day that the tariffs and the decision around the Russian oligarchs were announced, and Rusal; and so you don't expect that. There's been ups and downs. It has definitely been headwinds but we were able to offset it with price. I would say the market has -- and competition has been generally rational. So far, so good. It remains a risk, but no more so than the risk it was six months ago.

As you said, who knows what's going to happen next in this game of potential trade wars? We have also seen headwinds in transportation costs and in lumber, and we use a lot of lumber. Many of you have been in our factories. We use a lot of lumber for shipping our product. Again, we've been able to offset these with pricing. So, inflationary and pressures on the US are always a risk to future expansion. But so far, Eric, it's pretty much been held in check, and I think part of that is because it is such a moving target. People are a little bit more patient I guess right now with what long-term implications of these tariffs and trade wars might mean.

Okay, good. Thanks for that. Good color. Maybe just turning to retrofit; and thanks for the details there, I think the $50 million in bookings that you are targeting this year. I know, going back a ways, you had a $100 million goal for that business. So just curious, is that still the way you think about this, and where -- how many (multiple speakers)? Okay.

Absolutely. No question it is a longer lead time than the retrofit world I grew up in at Honeywell with HVAC and lighting controls. But it's real. We're winning a lot of business. We've doubled the team. It is a relatively low overhead effort where we've got a sales team and engineering -- and energy engineers in this business. It's a small team that we continue to add to. And this is the one place where we approach the market as Apogee. We typically don't do the installation on these projects. But we pull through our glass, our metals, our Wausau Windows, our Linetec finishing, our -- and it's a wonderful business, because it is the one place where we can go as a bundled package.

We can offer a solution to a building owner or a school or a municipality because we know the exact cost of making the glass, of building the windows, of installing them. And we have the energy -- and we do free energy modeling for our customers so that they can see what the returns are. So yes, this will continue on its trajectory to $100 million and beyond, as I had goaled when I put this together about five years ago now.

Eric, the additions that we've made to the team, actually a couple of them, are just actually starting in the month of July. And so there is a slow build for these activities but good momentum, and they're excited about accelerating it.

Okay, got it. Maybe last one for me, and I might have missed this in the prepared remarks, but could you just give the backlog breakdown between sectors, as you typically do?

Yes. We report the backlog for our Framing Systems segment and for Architectural Services.

Right.

So for Architectural Framing Systems, the backlog was $427 million.

No, I mean by sector, so office, institutional --

Oh, yes. Actually, I didn't raise that this quarter. Office is between 40% and 45%. Institutional is about 15%. Multi-family is kind of in the 30%, 35%. And then hotel, transportation, and everything else is 5% to 10%.

Okay. Thanks a lot.

Jon Braatz, Kansas City Capital.

Joe, we've been reading reports; I think in the month of May, construction costs in aggregate were up 8%. And I guess my question to you is, Joe, is there a point where you become a little bit concerned or a little bit nervous about the outlook ahead as these construction costs rise? Or if the 8% is sustained for a period of time, is there maybe a breaking point that might be a tipping point in terms of activity levels?

Well, Jon, I think there's always a tipping point and a breaking point, as you say. We're not seeing it. I would tell you I'd be more concerned about these -- the inflationary cost issues right now, if we were in an up cycle like the country was 10 years ago. Buildings were going up on spec. And there's more of an elastic relationship to these inflationary costs in that environment without tenants.

Buildings are going up now because the underlying demand is calling for the office space. That should withstand these inflationary pressures, in my opinion and experience. Again, I can't tell you what the breaking point is. Of course, at some point, if a building gets too expensive, if steel costs skyrocket; but fundamentally offsetting that risk is the underlying demand for office space, and frankly, improved office space.

The biggest issue employers face today -- we didn't talk about it on this call -- hiring workers. We generally do well at the construction site, our installation business. We're national signatories to the iron workers and glaziers. We get the people we need. We're a great employer. Where we have bigger issues is getting our -- getting factory workers. It's a challenge. We're at full employment. That's probably the bigger issue most of us have this day. And getting people, even in the office environment, to come work for you -- the younger generation, they want offices with large window views, clean views. And that is a trend towards more glass and better window-to-wall ratio in buildings. It drives companies to retrofit, not just for energy but aesthetics. And I think those things offset some of these inflationary concerns that you raised.

Okay, thank you. Jim, a question back to the EFCO margins. In the quarter it was breakeven. If you would net out or exclude the larger, problem projects, if you would throw those out, what type of margins would EFCO be operating at?

(technical difficulty)

Sorry. Jon, can you hear me?

Yes, now I can hear you.

Okay, sorry about that. So, excluding that work, at our -- where we're at today is maybe 2 points of margin. But where we have a little challenge with that is that we're still dealing with how those projects are carrying over and impacting the core business. (multiple speakers) there today at the beginning stages of those -- of our core business, we'd probably be back at that 2%, 3%.

Okay. All right, thank you very much.

Daniel, we've got time for one more question. And I would like to tell -- if we couldn't get to your question this morning, we will certainly follow up with you directly and take care of your questions. So one more; whoever's on next, Daniel.

Bill Dezellem, Tieton Capital Management.

You had mentioned qualitatively the glass -- Architectural Glass revenue -- pardon me, backlog, was up nicely from a year ago. Would you be able to quantify that in some dollar terms for us?

Bill, I was referring to the -- normally when I'm talking about backlog, although we provide a year-over-year comp, backlog is the one metric that's more important to talk about sequentially. And I was referring to Q1's increase in backlog, which gave me the confidence that Q2's revenues would be substantially higher. I said double digits, or midteens percentage increase in revenue Q2 over Q1, thanks to a backlog increase in that business.

Remember, the backlog -- this is a business that turns its backlog in less than 90 days. If we're in a slow period, we have lead times of 2 to 4 weeks. When we're busy, it's 10 to 12 weeks. We're busy right now, so that turns in and out in just 90 days. So year-over-year comp on backlog in glass is not a metric we put a lot of stake on.

Fair point.

And frankly, it's a metric of how the orders were for the last 2 to 12 weeks, depending on how busy we are. It's more the trend I'm concerned about, and it's been very, very favorable for the last -- the whole quarter, the order -- the bigger problem we had in glass was trying to hire enough people to make the product we'll be shipping for the rest of the year.

And Bill, as we've talked about, because of that quick turn in the backlog, we generally talk about, qualitatively, Architectural Glass in terms of our commitments or awards as well as our backlog. Because we have visibility in terms of that work much greater than what's specifically in the backlog, and that trend has been positive both year-over-year and sequentially.

So yes. So Bill, I use the word substantially; all of fiscal 2019's revenues for glass are in hand. Only a fraction of that is actually in the backlog. The rest is in the category, awards and wins. It's good as gold, but the customer won't literally give us the purchase order until 8 to 12 weeks before they want the product. And so we know when that is. We have the production schedules reserved for them. And so, close to 95% of our year is already in hand, in glass. And if you compare that metric to one year ago, we had about 75% of our year in hand. So, that's why we feel much more robust about our forecasting in glass this year.

That's quite helpful. Thank you. And then the last question I'd like to have you address is: relative to your progress in the mid/high market, could you talk in some detail about your successes and activities there? It was just a quick bullet point, I believe, on one of the slides in your opening remarks.

Yes. In our history -- our history has traditionally been reliant on large projects in glass. I've often stated that, as a company, we were way too vulnerable to that -- what is, in fact, the lumpiest piece of non-resi construction. Of all commercial towers, they have the highest peaks and the lowest valleys. That was more than two-thirds of our glass business, which was -- and glass was more than half of Apogee when I arrived.

That chart I showed, the area chart, shows we are far less dependent on glass as a company, although we love the business. And within that now we are more like half-and-half, small and medium projects.

We moved downstream in the medium projects because the margin profiles are the same, if not better; but you have to be able to deliver in more consistent and reliable lead times. And we were only able to do that because of the processes and the automation investments we've made in our glass segment, and the people we put in place that have allowed us to consistently meet the shorter lead times demanded in the mid segment.

And we continue to make those improvements so we're capable of continuing our journey to grow share in that segment. And we are underrepresented in the smaller projects in the mid segment and the small market itself. So, I'm confident that those investments we've made will allow us to continue to do well in this segment within glass.

And so if you could (multiple speakers) please go ahead.

Yes, Bill, we're almost out of time here. I'd like to just suggest that Jim and I and Carrie can follow up with you. I don't want to cut anyone off. I know there's a couple more that are in the queue, and I'm sorry. We'll be taking calls for the next 48 hours and beyond. And I just want to -- Bill, sorry, I'm going to have to cut you off and thank you. It was great to see you here recently.

And again, I'd like to thank everyone. I hope you realize we're off to a great start. Hope you heard our message well today, and I look forward to follow-up calls with some of you on this phone call. Have a great day; and look forward to reporting more success in Q2 in 90 days. Thank you.

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