Apogee Enterprises Inc (APOG) 2019 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q2 2019 Apogee Enterprises Earnings Conference Call. (Operator Instructions)

I would now like to introduce your host for this conference call, Mr. Jeff Huebschen. You may begin, sir.

Thank you, Kevin. Good morning, everyone, and welcome to Apogee Enterprises Fiscal 2019 Second Quarter Earnings Call. With me today are Joe Puishys, Apogee's Chief Executive Officer; and Jim Porter, Chief Financial Officer. I'd like to remind everyone that there are slides to accompany today's remarks, which are available in the Investor Relations section of Apogee's website.

During this call, we will reference certain non-GAAP financial measures. Definitions of these non-GAAP measures and the reconciliation to the nearest GAAP measures is provided in the earnings release we issued this morning, which is also available on our website.

Also, I'd like to remind everyone that our call will contain forward-looking statements reflecting management's expectations, which are 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.

And with that, I'll turn the call over to you, Joe.

Thank you, Jeff, and welcome to Apogee. Jeff joined us recently to lead Investor Relations, and he comes to us with a wealth of experience, and we're happy to have him here.

By now, everyone has had a chance to read our press release and look at the numbers. Strong market conditions helped us deliver solid organic growth. Our adjusted earnings per share, in line with the year ago and increased cash flow.

Our Architectural Framing Systems, Architectural Services and Large-Scale Optical segments all delivered solid results and in line with our expectations. However, the Architectural Glass segment faced significant challenges as it ramped up production to meet faster-than-expected demand increases. This caused the business to fall well short of our expectations for the quarter and to impact our full year outlook.

This morning, I'd like to discuss, one, the issues that impacted our glass business and the plan we have in place to resolve these challenges; I'll review the quarter's highlights across the rest of our businesses and discuss Apogee's positioning for the future; and then I'll turn it over to Jim for more details on the quarter and our outlook.

So starting with digging into the Glass segment. Over the past few quarters, we've been anticipating a rebound in our Glass business. As we saw increased bidding and customer commitments that we prior [commented] on, we continue to win in the midsize market, and we regained share in large projects. This recovery played out as we had hoped. And in an inherently lumpy business, it happened even more abruptly than projected. We saw a surge in customer demand over the last 90 days, making the second quarter the Glass segment's strongest quarter of orders in over 15 years, including prior peak levels.

We saw strong orders across the segments of the market, all 3 segments, including some nice wins in our traditional core market of large project work. Unfortunately, the slope of this recovery was substantially steeper than we expected, and we struggled to rapidly ramp up production levels in our factories. At the root of the issues was the challenge of hiring and training qualified new employees in an extremely tight labor market.

To put some detail behind this, during the quarter, we added over 300 new employees in our Glass factories, a 20% increase to the workforce within the quarter. It's taken longer than expected to recruit, hire, train and retain the new staff and to bring them up to targeted productivity levels in our complex custom manufacturing operation. As we worked through this ramp-up, we experienced a drop-off in margins and higher scrap rates, lower throughput and more expedited orders, all related to the influx of new employees.

Should we have been better prepared for these challenges? The simple answer is yes. We've successfully managed through fluctuations in our Glass business before. However, the magnitude of the order ramp-up we experienced, and the preceding drop-off over the prior 4 quarters was much greater than expected, and we were surprised by the difficulty we faced recruiting and hiring new staff in the current labor market. The fluctuations in orders over the last 4 quarters mirrored what normally happens over 4 years.

While we're disappointed with these results, these are manageable challenges which we've taken aggressive steps to address and return this business to its typical levels of performance.

As I mentioned, we've added over 300 new employees. Operational performance with these new employees progressed as we moved through the quarter with improved productivity in August compared to June and July. We've enhanced our new employee training to address the scrap, rework and other issues we saw in the quarter. We've also deployed quality and lean manufacturing resources from across the rest of Apogee to help the Glass segment manage their production ramp-up. Finally, we continue to make targeted investments in automation to relieve labor-related pressures.

Though we have challenges scaling production fast enough to meet demand, the orders we saw in the quarter demonstrate the underlying strength of our Glass business. Viracon is a leader in its market. Just as importantly, we have a world-class team, which is up to this challenge. With our recent order strength, we have visibility to revenue growth for the remainder of fiscal 2019, and we're building momentum that will carry into the new year.

Our backlog in Glass is at its highest level in my 7-year history at Apogee. I'm confident we'll see steady improvement in return to typical levels of productivity and margins in the Glass segment as we move through the rest of the year. This is not about taking a business to unprecedented levels of performance and heights. Rather, this is restoring a very good business to its historical performance, and we are up for this challenge.

Shifting to the rest of Apogee. Performance in the quarter was solid across our other 3 segments, which you can see from my comments on Slide 4 in our presentation. Total company revenue grew a healthy 5% in spite of the 10% headwinds from Glass, our 14th consecutive quarter of year-over-year sales growth. The growth was organic as we have now anniversaried the EFCO acquisition.

Growth was driven by Architectural Services segment, which was up more than 60% in the quarter as we continue to execute on the backlog we booked over the past several quarters. Services backlog remains strong, and the segment is fully booked for the remainder of fiscal 2019 and much of fiscal 2020. Just as impressively, services turned in 10% operating margin, a nice ramp-up from 7.3% in the first quarter.

While margins benefited from operating leverages, services also had strong execution across its project portfolio in the field. The business has fully embraced our continuous improvement and lean initiatives, and they've made great strides in improving project selection and pricing. Taken together, Services is a much better run business today with a strong outlook in the fiscal 2020 and beyond.

Results in Architectural Framing were in line with our expectations with revenue and operating margin comparable to last year. Our legacy Framing Systems businesses, those which we've been running under our playbook for past 5 years, continue to perform quite well, offsetting expected lower growth and margins in our recently acquired businesses. We continue to make steady progress in our improvement initiatives at these acquired companies.

Finally, Large-Scale Optical had another solid quarter. Year-to-date, this segment has delivered 6% top line growth and continues to post 20% plus operating margins. Large-Scale Optical is a well-run, efficient business that is uniquely positioned in its core markets. We expect continued steady performance through the rest of the fiscal year.

Putting it all together, we delivered adjusted earnings per share of $0.75, in line with our prior year despite the significant drop-off in Architectural Glass. Cash flow also remained strong with nice year-to-date growth in free cash flow.

Looking at our outlook. Performance across most of our businesses, I noted, was solid. Yes, I'm frustrated with the short-term production issues in Glass, but I'm confident as ever in the markets we serve our strategy and our long-term direction.

Slide 5, in my presentation, frames my confidence in our business. First, we've discussed over the past several quarters we've made tremendous progress in reshaping and diversifying Apogee's business mix. Apogee has delivered consistent year-over-year revenue growth every year since 2011, a trend that will continue this year. We've achieved this consistent growth despite variability and lumpiness on our end markets, which highlights the strength of this diversification.

The chart on Slide 6 also illustrates how we've shifted our emphasis to Architectural Framing, a segment where we have strong, competitive positioning in a fragmented market and where we see our most significant long-term opportunities for growth and margin expansion.

We've assembled a strong collection of market-leading businesses with multiple growth levers across our portfolio. In each of our segments, we have opportunities to increase market share, expand into new geographies and markets and to introduce new products. These growth opportunities are supported by solid bidding and order activity, a robust and increasing backlog and continued favorable outlook for North American commercial construction market. This visibility gives us confidence in our outlook for top line growth for the rest of the fiscal year and fiscal 2020. We are also pursuing numerous opportunities to improve operating margins across our business segments. We've already discussed near-term plans to return profitability in Glass to our typical levels and beyond.

In Framing Systems, we're executing a multiyear plan to move operating performance in our recently-acquired businesses, EFCO and Sotawall, toward the 10% plus operating margin level that we achieved many years ago on our legacy Framing businesses. Apogee has developed a disciplined playbook of reliable, repeatable business processes, which have allowed us to make significant margin gains in our legacy Framing businesses. We're applying these methods to drive performance improvements at EFCO and Sotawall.

We're also continuing to work towards realizing the purchasing and operational synergies from these acquisitions. Throughout Apogee, we're making further investments in automation and driving our lean and continuous improvement strategies to increase productivity and lower cost. We're also pursuing geographic expansion in our most profitable core businesses.

Finally, Apogee remained -- maintains a very strong financial position. We have a solid balance sheet, low debt levels and a track record of strong cash flow. This gives us significant financial flexibility to drive shareholder value. As I mentioned last quarter, while acquisitions remain a part of our long-term strategic growth, our current focus is on improving operational performance of our recently acquired businesses and returning Glass in the short term to its place at significant operating margins. We'll continue to make disciplined investments in high-return internal projects that add capability and drive productivity gains, and we continue to evaluate returning cash to shareholders through share repurchases and our regular dividend.

With that, I'll pass the call over to Jim, who'll provide more details on the quarter and our outlook. And then I'll come back, closing comments and take your questions. Jim?

Thanks, Joe. And good morning, everyone. I'll begin on Slide 8 with our consolidated results. Consolidated revenue was up 5%, driven by strong growth in Architectural Services. This was partially offset by a decline in Architectural Glass.

Total company operating income increased to $28.7 million, primarily due to increased volume and higher productivity in Architectural Services, along with good performance in Architectural Framing Systems and Large-Scale Optical, partially offset by the profit decline in Architectural Glass that Joe discussed.

Adjusted operating income was $29.7 million, which adjusts for the amortization of short-lived intangibles from the Sotawall and EFCO acquisitions. Adjusted EBITDA was $42.1 million. Earnings per diluted share were $0.72 compared to $0.60 in the prior year period. Adjusted earnings per share were $0.75, even with last year.

Now I'll turn to the segment results, which are on Slide 9. In Architectural Framing Systems, revenue of $189.9 million was roughly in line with the prior year. Adjusted operating income improved slightly in the quarter to $19.4 million with adjusted operating margin of 10.2% compared to 10.1% last year. We continue to have good momentum in the Framing Systems businesses that have been in our portfolio for more than 2 years.

Architectural Framing Systems also had another strong quarter of orders, led by some nice project wins in the longer lead time portions of the segment. Segment backlog ticked up to $428 million.

Joe already described the factors driving results in Architectural Glass. Segment revenue is up 15% sequentially compared to the first quarter, marking the segment's first quarter of sequential growth since the end of fiscal 2017. In relation to the prior year, revenue declined 9.5% to $88.1 million. As Joe described, orders increased dramatically beginning early in the quarter, reaching a multiyear high point for quarterly inbound orders for quick turn. The challenges with hiring and training new production staff to meet this demand, along with lower leverage, led to a decrease in operating income, which came in at $1.7 million compared to $10.3 million last year.

We are confident in the ability of Architectural Glass to return to operating performance levels it has and can perform at, and we're seeing weekly progression towards that.

Architectural Services turned in another terrific quarter. As expected, revenue grew sharply over last year, increasing 63% to $76 million. Operating income came in a bit above our expectations at $7.6 million, and margins were 10%. This strong performance was driven by leverage on volume growth, a favorable project mix and strong execution. Segment backlog decreased sequentially during the quarter but still stands at a healthy $405 million. At this back level, Architectural Services' fiscal 2019 is fully booked, and we have good visibility in fiscal 2020 and beyond with a strong project pipeline.

The Large-Scale Optical segment continued to deliver solid performance this quarter. Segment revenue was flat compared to last year. Fiscal year-to-date, Large-Scale Optical has grown by 6%, tracking to our mid-single-digit growth expectation for the year. Segment operating income was also in line with the previous year as the segment continued to deliver consistent 20-plus operating -- 20% plus operating margins.

Turning to Slide 10. The company's financial position remains strong. Total debt stands at $225 million or roughly 1.3x trailing 12-month EBITDA. We continue to generate cash with year-to-date cash flow from operations of $48 million, which is 17% above last year's level. Year-to-date capital expenditures have been $24 million as we continue to make disciplined investments in high-return projects that will add capabilities and improve productivity. Free cash flow stands at $25 million year-to-date compared to $14 million through the second quarter last year.

In the first half of the fiscal year, we returned approximately $9 million of cash to shareholders through dividend payments, 10% higher than last year.

Finally, let me turn to our outlook for the remainder of the fiscal year. Slide 11 presents an updated look at our guidance. We now expect full year revenue growth at between 8% to 10%, with lower projected revenue in Glass and Architectural Framing Systems than from our prior guidance. We expect Architectural Glass revenue will be flat to slightly down for the full year as some of the revenues we weren't able to capture in the second quarter won't be recovered. As throughput in the Glass segment improves, we expect sequential growth in the third quarter and again in the fourth quarter.

We expect Architectural Framing Systems revenue will be up nearly 10% for the full year. Driven by project-related timing, we now expect lower sales in the third quarter, which should show a slight decline to last year and with the fourth quarter the strongest of the year, with growth over the prior year. Architectural services will be up around 30% for the full year, with year-over-year growth moderating through the second half of the year based on project schedules. And we continue to expect mid-single digit full year growth in Large-Scale Optical, with the fourth quarter the strongest.

Our outlook for operating margin is now a range of 8.3% to 8.8% and adjusted margin of 8.6% to 9.1%, with lower expected Architectural Glass margins offsetting an improved outlook in Architectural Services.

We previously expected full year margins in the Architectural Glass segment would approach 10%. We now expect steady improvement from the 2% margin level in the second quarter, but full year operating margins are expected to be between 6% and 7%. We now see Architectural Services segment margin for the full year between 7% to 8%. Our disciplined project selection process is facilitating continued strong project execution.

Our full year margin forecast for Architectural Framing Systems and Large-Scale Optical are consistent with their prior guidance, Framing Systems at approximately 8% and Large-Scale Optical almost 25%. We're expecting interest expense to be slightly higher than we previously expected, and we continue to forecast our tax rate at approximately 24%. Putting it all together, we now expect earnings per share in the range of $3 to $3.20 and adjusted earnings per share of $3.13 to $3.33.

We estimate depreciation and amortization for the year at approximately $53 million. As we described in the past, our business is inherently lumpy driven by large projects and customer construction schedules, with timing that's often beyond our control. There's actually difficulty forecasting quarter-to-quarter changes.

With that said, we currently expect stronger overall performance in the fourth quarter than in the third quarter as the Glass segment continues to make progress and as expected project timing holds down third quarter results in the Framing segment.

With that, I'll turn the call back over to Joe for some concluding remarks.

All right. Thanks, Jim. So as I said earlier, we're not happy with the operational issues in the Glass segment this quarter. This was a bump in the road, a significant one, I admit, but it is nonrecurring. The strength of the rest of our businesses were on display as we delivered solid organic growth, in line year-over-year adjusted EPS, higher cash flow despite the significant margin shortfall on Glass. And I'd like to reiterate that the challenges in the Glass segment were due -- in part, mainly due to strong customer demand for our products, a surge in orders and significant sequential revenue growth, which all point to the segment's long-term underlying strength.

In the third quarter, we expect our Glass segment will improve operating margins by several hundred basis points compared to Q2, and Q4 will similarly be better than Q3 by several hundred basis points margin. Industry fundamentals remain very positive, which, together with our significant backlog and strong order activity, give us good confidence in our direction for the rest of the year and into the future.

Finally, cash flow and our balance sheet remain strong, which positions us well to deliver long-term shareholder value.

With that, I would like to open up for questions. And Kevin, if you would please do so, thank you.

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

As you look or think about the business over the next couple quarters, and you call that Framing, and that, that's a component in fiscal '19 due to timing, do you think that in 3Q, 4Q, you'll largely have the Architectural Glass, the issues you've experienced wrapped up and pretty much back to where you want them to be entering fiscal '20? Or do you expect there to be a little bit of an impact in fiscal year '20?

Yes, Eric, I'll take Glass, and Jim will comment on Framing. Yes, absolutely, we expect to end the fourth quarter -- or the margins in the fourth quarter should be back to normal or very close to normal. We'll certainly end the full year -- let's call it, the February results, I would expect to be at least at what we would have expected going into this year. I did mention several hundred basis points of margin improvement in Q3. Obviously, I'm monitoring it every week with our business. They have done a good job to address the situation. The month of September is showing good improvement over August. And we won't be there by the end of the third quarter, but we will be by the end of the fourth quarter, and I'm hoping that the fourth quarter -- full quarter operating margins is substantially close to where we need it to be. Certainly, by the end of the year, the run rate.

And it's Jim, I'll just comment on Framing Systems. Similarly, the timing of the work that we have, Q3 is a bit lighter, but we see the run rate and the work ahead of us from Q4 carrying forward into fiscal '20.

Okay. Maybe a good segue, just you did give the visibility that you've got in the Services business. '19 booked and fiscal year '20 virtually booked. Just wondering if you can give similar commentary, I know you have in the past, on Glass and Framing and certainly on Glass, just given the level of orders you saw in this quarter or you've seen over the last quarter plus.

Yes. Order to delivery lead times are substantially lower in those Glass, and most are for the 6 Framing Systems businesses. I mentioned it briefly. Our backlog in Glass increased in the quarter, obviously, partly due to our problems. But also, as I mentioned, we had substantially higher orders than any order in the last 15 years and virtually in the history of the business. That continues. We've already had a strong start to September. The business is starting to work down its lead times. And I would say, they feel better about fiscal 2020 than they have about any next year out at this time in the fiscal year. So we feel pretty solid about fiscal '20. We did have lower revenues in Q1 and Q2. Obviously, the comps next year are going to be substantially easier. But the overall state of the orders, and the bidding activity is substantial. I mentioned it, we have won back some of the share in large project segment. That was welcome, but it did come with pretty short notice, to be frank about it. And that bodes well for next year as well. And the Framing Systems segment for the 6 businesses are very short order to delivery. Bidding and award activity is very positive. The headwinds -- we've achieved this growth this year in spite of some substantial headwinds from Sotawall's revenues due to the orders last year. Their backlog is up substantially this year. We'll see solid growth in Sotawall's revenue stream next year. And again, we're starting to see good award activity in Canada, which is new for us since we acquired the business. It's been primarily Northeast United States. So Sotawall is a long lead time business and that bodes well. The others are too short, I would say, to really address fiscal '20.

Yes, okay. Understood. Maybe last one for me, just on the -- on EFCO and the legacy projects that you need to work through. Just an update, I mean, is there -- are you still thinking that, I believe, one, you're close to being done and another, if you look at a few quarters, that will be complete as well?

Yes, that is still true. One is nearly complete. The other one will really start, frankly, to revenue in second half of Q3 and then frankly, for about 2 years as we will be totally focused on production. I think we've told you all that EFCO is solely responsible for building the system. Our Services business will be doing the installation and installation management over this couple year project. We expect low margins, but it is expected to be profitable.

Our next question comes from Chris Moore with CJS Securities.

Joe, you talked a little bit about geographic expansion. Can you maybe get a little bit more specific there? Is there any fear in terms of from a labor perspective or anything like that? Or kind of any challenges that you see on that front?

Yes. We've done painstakingly detailed analysis of the workforce, where we're talking about them. Obviously not going to get into specifically which business in which location, but these are very profitable businesses for us. They have handled internal expansion quite well up till now with investments in the regions we're looking at. Things we'll be talking to our board about our -- or in some of the best -- better labor markets out there. Our biggest challenge, frankly, as a company has been Southern Minnesota. Some people have asked, "Why did you shut that factory down in Utah if you saw this coming?" That's a fair question, but frankly, the capabilities of the Utah factory would have only had a minor help in our second quarter struggles to meet this ramp-up in production. So that wouldn't have really helped us. The issue is the labor force in Southern Minnesota, frankly, we've made some adjustments to our pay scale. The team has come up with some innovative recruiting techniques, and our expansion plans would be in other region of the U.S. in both -- in all of our segments.

Chris, as you know, geographic expansion is an important strategy really across all of our businesses and in our process for looking at those.

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of labor is frankly the top criteria in all the evaluations that we look at for expansion.

And Chris, we're talking about internally investing in equipment, processes in our very profitable businesses as opposed to acquiring a stranger in that particular part of the world or U.S., and I'm sure the investors will respect that and appreciate it.

Got it. You went through it, Joe, but I missed it. Just in terms of the EFCO margin progression. So I know you're talking about being profitable second half of this year in EFCO. Is -- from a kind of trajectory standpoint, is it just going to be kind of slow and steady over the next couple of years? Is there any point where that likely would spike?

It'll be slow and steady. We are in the midst of an announced investment in the factory there that the prior leaders of the business under the prior parent, we're trying to get approval for. I understand why the prior parent didn't approve it based on their long-term plans to exit that nonresidential business called EFCO. We have approved that. We -- it's been in the press that we're adding some substantial cost or investment for the factory in Monett, Missouri. And that will be done in about the May time frame of next year, May, June. And we'll really start to amp up the productivity improvements in that business, I'd say, slow and steady. Until then, we still have purchasing synergies we're driving. And over the next 3 years, my goal is for a couple hundred basis points of margin expansion each year.

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

Joe, on Glass, with lead time shorter and orders pretty strong here, I guess I'm confused why we wouldn't see faster growth this year even with the inefficiencies? Is that because you're picking up more of the larger project business?

No. You will see -- we've been on a downward trajectory on orders for the last 4 quarters prior to Q2. We had been talking about the wave was coming. You would think we would have been better prepared, and it's unfortunate that it caught us by surprise, the magnitude, and then it started to snowball. And if you've ever run a factory, when you're overwhelmed with business, it starts to become a fire drill and a crisis, and it's unfortunate. It -- we are working out from under it. We've seen improvement. The main issue was in June, where the avalanche hit. July was slightly better. August was slightly better. September will be better. We will see nice growth in revenues in Glass in the second half of this year and next year. So the revenue growth is coming, Brent. The reason we didn't see it in the first half of the year was simply the flow of orders. And the last 2 quarters or last 3 quarters of last year, and the first quarter of this year, it's come roaring back. As I mentioned, we don't really publish backlog in that business. We're typically -- we have always historically strived to be a 12-week lead time business. We managed that down to 6 to 8 weeks consistently, which allowed us to win share in the mid-markets. The avalanche of orders have driven up the lead times, and we're fighting to get those back in the next 90 to 120 days. And as we manage that backlog down, you'll see pretty solid revenue growth in the second half of the year in Glass.

Okay. And then, I guess, given some of the challenges there, are you -- I mean, are you deliberately kind of laying off the gas pedal in terms of accepting new orders? And I guess, also, in addition to that, given what you're seeing out there, do you need to think about another round of hires in response to demand?

They continue -- let me work backwards. They do continue to hire. They've learned a lot. We -- a lot of the people we've hired are -- English is not their first language, so we've actually had to amp up our recruiting and hiring of translators that's in place. We still have more hiring to go for the second half of the year. But let me be clear, Brent, we're clearly beyond the blip, the crisis, the substantial bump in the road. The business has learned how to improve. We've been bringing other resources in from Apogee. I'm fairly confident in the hiring plans for the second half of the year as we move forward. And you asked something before the hiring. I forgot, I'm sorry.

And Brent, it's Jim. So we continue to take orders. I think in the end of the day, some of the kind of mid-market work requires shorter lead times. As Joe said, we've made improvements to that, and we're still largely competitive with kind of regional fabricators. But we continue to actively pursue all potential work that's out there.

Okay. And then one more, and I'll get back in queue. I guess within that segment, we've seen sort of a reversal in the dollar again. It doesn't seem like it's impacted the order trend by any means but just curious if that's changed any competitive behaviors out there.

Yes. I mean, we continue to flub around in the $1.15, $1.17 area, U.S. dollar to the euro, which is the most important exchange rate issue for us. I'd love to see it go back in the $1.25 range. It's not -- nothing has changed because of where it is. Brent, the biggest issue, even really good competitors that we respect greatly, it is a challenge to have such a long logistical supply chain. It does come with unanticipated cost, hidden cost. And when you complete a project and realize the total delivered cost wasn't quite what you expected, if you have to expedite Glass, it's extremely expensive. It may not be the glass fabricator's fault. Somebody has to cover that cost. We started to see some customers that were the first to leave us to test offshore glass due to the cheap price come back to us in a fairly big way. So I would say it's balanced. We've gained some of the share back. We like our position. This issue helped us become better in the mid-market this second quarter, blip aside. We're learning from it, but we've become better in the mid- and small project size with consistent deliveries. We've got to do a better job of balancing, being capable to take on $6 million projects and $60,000 projects as well, and I think the business is well prepared to do that, and we're getting -- we're very close.

(Operator Instructions) Our next question comes from Jon Braatz with Kansas City Capital.

Just a follow-up on that last question. In the last -- in this past quarter, you hired 300 new people in Architectural Glass. What do you think, going forward, the magnitude of the hiring number will be relative to the 300 you did in this past quarter?

Yes, it's maybe 1/3 of that. One of the issues we had, Jon, was to get -- to net to 300 adds, we probably hired actually about 600. It's tough work. It's not simple. And by the way, that 100 we still have to add is over both the Georgia and Minnesota facilities. But it's a challenge. And as I said, should we have been better prepared, we knew we had a tight labor market. That was not a surprise. I would say, in the last year, maybe more, the labor market, since the last time we had to go through a hiring effort like this, the market has gotten substantially tighter. We, like all manufacturers, are facing a labor shortage, and we just missed it. We did not anticipate the challenges of getting qualified workers. Those that make it through the first 90 days stay, and they're good employees, but there is a ton of turnover in that first 30 days, which cost us dearly. I'm not anticipating these kinds of issues in Q3 or Q4, although we still have some hiring to do. But we've got the center of gravity behind us now.

Of the -- when you look at the 400 new hires you might be making or will make...

Counting the 300 we already have, not the 400 we did...

Yes, yes, exactly. As the market stabilizes, 2 questions. Number one, will you continue to need those 400? And then secondly, I guess a bigger question is, over the last couple years, you've invested heavily in automation productivity and so on in the Glass business. Why wasn't that better able to handle the incoming orders more efficiently?

Well, it's a fair question, and you won't like the answer. But the truth of the matter is it would have been substantially worse if we had not made the investments we've made in automation. The automation is expensive. It does have returns when you see the impact of the quarter. You could argue that the returns are probably better than we had modeled. We have substantial opportunities. Those that have walked our factory have seen the automation on the front end kind of in the cutting area and then the back end, where we build IGs, insulated glass units. There's a substantial opportunity in the middle of the factory. It's not cheap. We evaluate it. I do believe that you asked the question I expected earlier in this call is, how are we going to manage when there is a downturn in orders? And we don't anticipate -- we still feel we're going to continue to see end markets that slowly grow, bounce along the top, continue to grow. But within that, I'd say, within this upmarket, we're seeing a trend towards more egregious peaks and valleys. So as you have -- if you plot out the last 3, 4 years, you'll see this trend up, but you start to see the intra-quarter -- the intra-year ups and downs have very violent peaks and valleys. It's kind of the overreaction to news in our world, in our markets. The overall trend is good, but we have to get better at managing the short-term peaks and valleys. We took a week out of production in our Q1. That was a mistake. We should not have done that. The -- hiring those people back turned out to be more challenging. We'll be more careful. We may be not micromanaging the P&L in 1 month at the expense of the next, so we'll look at that. We do still have a substantial amount of temporary labor that we can use to more appropriately flex our workforce, and we continue to work on more creative hiring practice. And as I mentioned, we made some payroll adjustments for certain job classification to help us where we're having the highest turnover. So all in all, I do feel good about our ability to manage this going forward so we don't have to explain operational misperformance going forward.

So we do, Jon, continue to have projects that are still in the process of being implemented in additional automation so that -- with the long-term eye of continuing to do whatever we can to automate.

Jon, if you -- one metric I'll give you. I'll let you ask all your questions. But our orders in Q2 were 50% greater than the orders of both Q4 and Q3. So -- and those quarters had come after a few quarters of decline. We should have kept our workforce in place if we had seen that we were going to be -- our run rate for orders in the second quarter would annualize out at revenues 20% higher than our record year. So we don't expect every quarter to be this high, but it just -- it does show you. And it's a shame. At a time where we should have been minting money, we were creating productivity problems with quality and rework, and it is a shame. It's embarrassing. But like I said, I believe we're on the right path to have this behind us very quickly.

Ultimately, Joe, would you consider some of the 400 new hires to be temporary?

Not at this time. Certainly, the -- we have an ongoing temporary labor force that's really outside of the new hires that we would [use to match] our workforce.

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

Not going to ask about Glass. But just on the Framing Systems margins, I mean, it does look like they are bouncing back at the last couple quarters. Just anything unusual? Or is this pretty solid evidence you're surpassing some of these issues at EFCO?

Yes. So let me comment. Just -- listen, there are 6 businesses in Framing Systems. They're all in the related market. But every business will have -- some fire on 8 cylinders, some fire on 7. You always have red lights and green lights in a particular quarter. All in all, we like where the business is going. Our most profitable businesses are growing the fastest. The headwinds at Sotawall will be behind us. I got a new leader, of course, that started earlier this year at EFCO. He's doing a terrific job. We put a brand new -- we put a new sales leader in, a proven executive from my team. He was running our retrofit initiative. He did a fantastic job with that, built a team to take over. He ran our Wausau sales for several years. He worked in our Harmon services business before that. I respect him more than anybody, and he's now leading our effort at EFCO to help us drive top line so we can better leverage the operational improvements we're making. So I feel really good about the long term for Framing Systems. Short term, there'll always be puts and takes within a quarter anytime you have 6 different businesses.

Yes. And really, the drivers in our Architectural Framing Systems segment are volume leverage and project selection and productivity and so we see that -- particularly, as we look to the fourth quarter, where we really see more of the volume leverage to go through and be able to help if the project selection is really a key attribute, primarily in our longer lead time businesses, where we've had some of that move out. So Q4 and into next year, that segment's really well positioned.

Okay. But the problem contracts at EFCO, you're effectively surpassing those now?

Yes. Yes. As Joe described, the one project is -- we're like 98% complete. And so I mean, that's just a drag because it's a little bit of work that has cost associated with it. But overall, it's really the -- and then the other project is really just starting. And so it's really that core business and getting -- we're making nice progress on the productivity initiatives. Continuing to drive -- to grow the order intake on that core kind of bread and butter business, that was their business. As we look later in the year, we start to see some momentum with that.

The project Jim referenced, that's just basically starting. We've incurred a lot of cost and headwinds to get to this point. So this is a big milestone where we're pretty much now past. We're getting past the engineering and hopefully can totally focus on producing units, and I'm more comfortable with that. Getting to this stage has been a battle. We're not quite there, but we're almost there. And I expect in the third quarter, we'll be focused on producing instead of designing.

Okay. And then just one -- on Services, Jim, I don't think you said what portion of the backlog gets done this year and then what percentage into fiscal 2020.

Yes. It's about a little less than 50% this year, and then the rest beyond that. Some of it -- I don't have the specific breakout between fiscal '20 and 2021. Kind of quarter-to-quarter, that moves around. But this year is fully booked, and next year is largely booked.

And I'm not showing any further question at this time. I'd like to turn the call back over to Joe.

All right. Kevin, thank you. And to all of you, I appreciate your time and patience today. I realize we had a self-inflicted wound in the quarter, which contributed to our miss to your expectations and ours. But as I said, this is an episodic issue. It's not a symptom of the health of the Glass business. We will restore that to its rightful place of double-digit operating margins in -- before this year is out. We look forward to further engagement with many of you that are on this call over the next day or 2 and over the course of the quarter, and we look forward to delivering better results in all of -- in our Glass segment and the rest of Apogee as we go through the third quarter, and I appreciate your time today. Thank you very much.

Ladies and gentlemen, this does conclude today's presentation. You may now disconnect, and have a wonderful day.