Apogee Enterprises, Inc. (APOG) Q4 2018 Earnings Report, Transcript and Summary

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 maybe recorded. I'd 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 will discuss non-GAAP financial measures when talking about Apogee’s performance. You can find definitions for these non-GAAP financial measures in our press release. We called out adjusted earnings related to our recent acquisition 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. Then 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 four segments delivered on their forecast. In addition in the quarter, we 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 $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've been positioning each of our four segments to achieve new levels of performance. We've 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 broad range of products through our acquisitions and numerous new product introductions in every business unit and we are 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 event initiatives. We continue to penetrate midsize markets in Architectural Glass that are being awarded more large projects, while reducing fixed costs 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 in 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 that services organization won substantial number of projects in fiscal 2018 to grow their backlog by more than $100 million this year. The business now has had five 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 issues in F '18, F '19 will show substantial improvement. Our investment in new market sectors for our large-scale optical glass and acrylic products are expected to deliver growth for this high-margin segment in fiscal 2019. We 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 is being expanded to help us better penetrate the substantial United States market of older buildings meeting ecstatic 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 moment 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 continued 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 to increase pricing, share gains, increased geographic penetration, new product introductions and productivity improvement. This has been the story for five plus years now and we have a lot of runway ahead of us. Our acquisitions of EFCO which is part of 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 comes with challenges, we have the expertise and resources to bring EFCO up to Apogee levels of performance. That said, we now recognize that we're 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 will 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've started executing on operational improvements, and are being spearheaded by Apogee Senior VP of Operations, who is now the President of EFCO. We have approved investments in equipment for 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 lead 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 Apogee. We are 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 in our three 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 used in architectural glass. It manufactures repetitive, the very high value added products allowing the greater efficiencies that yield high margins. As we guided in fiscal 2018, architectural service 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 to do the significant backlog build 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 and 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 midsize projects midway through fiscal 2018 to continue gaining share. Let me be clear, the larger more complex value-added midsize project continue to have attracted and better margins. It is encouraging that architectural glass commitments today are currently at 25% ahead of where they were one 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 will 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're 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 adjusted operating margin will decline primarily due to the impact of the EFCO business which we expect to be a 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 includes investing in geographic expansion in our framing systems segment to continue our share gain 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 forecasts for continued U.S. commercial construction growth and our visibility includes a healthy backlog and a pipeline of projects we're 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 markets, the ABI and Dodge Momentum Index continue to indicate future growth and projects starts in Canada are anticipated to rebound in fiscal 2019 as well, certainly based on forecasts from Construct Connect. 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 two years. We're 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 in our fiscal 2019 outlook. Fiscal 2018 saw a record revenues for Apogee of 19% to $1.3 billion but down 4% excluding the Sotawall and EFCO framing systems acquisition. 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 midsize projects, architectural glass revenues were down due to lower volume of larger projects and a hurricane related delays. Revenue in our smallest segment 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 and 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 growth and operating margins were down with reduced volume leverage in architectural services and architectural glass, inclusion of EFCO currently on lower margins, and glasses 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 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 a reduction in deferred income tax liabilities. Included in our operating margin and earnings per share adjustments, our acquisition related costs and amortization of short-lived acquired intangibles associated with the acquired backlogs of Sotawall and Optical, 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 in our approach to capital allocation, we are 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 in 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. We continue to have strong working capital management discipline. Full-year capital spending of $53 million was focused on productivity and capability investment primarily for architectural glass for new products and an 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 one-time 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 zero in fiscal 2017 due to the increase in debt to support our recent acquisition. Turning to the fourth quarter segment results. Architectural Framing Systems segment revenues were up 51% in the fourth quarter. Excluding the 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-over-year adjusted operating margin for the framing systems segment was 10.3% versus 12%. Triple digit basis point increases in operating margins for legacy business 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 remains 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 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 more insurance costs 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 transferred 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 at backlog levels. Architectural glass fourth quarter revenues declined 18% compared to a very strong prior-year fourth quarter. The architecture glass operating margin was 4.4% compared to 12.3% in the prior-year period on reduced 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. They 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 base had new jobs by the time of the closer and with the good progress being made for remaining employees. Finally although the Large-Scale Optical segment 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 three architectural segments reflect strong activity in the office sector and multifamily residential sectors each at almost 40% of the overall working backlog. Institutional, which is government education and healthcare is 15% to 20% of backlog and less than 5% of the backlog is for projects in the hotel entertainment and transportation sector. The mix of multifamily projects increase driven primarily by a few larger high-end project many with multiuse 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 segment. Our fiscal 2019 growth outlook by segment is for architectural framing as 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 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 in our 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 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 improvements. As we previously stated, EFCO has had a low starting point and so we have a longer journey to margin improvement. We remain optimistic about the longer-term opportunities for this business and its contributions to Apogee. We are making good progress against synergies we have identified that Joe laid out. Through these initiatives to-date we have identified and have plans 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 project schedules that we service, I want 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 margins. 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 non public companies we can't be assured that they will have the same discipline which we 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 a majority of the aluminum that we use. We monitor these costs and projections and continually adjust our bid prices were possible. For shorter lead time businesses, we’ll focus on raising prices to offset any additional increases and we've 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 market, at least through fiscal 2020. We have good momentum and solid strategies that we believe continue to position us, 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 no small part a result of the transformation as a company over the last half decade plus. Seven years ago, Apogee was less than $600 million in revenue and glass was 40% of Apogee and a dominant percent of glass was 12 towers and hence approximately one-third of Apogee was tied in most volatile segment with a non-residential construction. When the end markets crashed, so did we, no surprise and we chased limited work with price, a mistake will never make again. We had weak operations excellence prophecies 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 systems segment, where we were underserved. To focus our acquisitions in this segment, to gain share, improve our cost structure and build the 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 - well 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 up pricing for 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 loss substantial share in our traditional core markets as well as losing our export base in spite of this we rose to 60-year historical high in revenue, earnings and operating margin in F 2017 both in glass and Apogee. We did this by our factory productivity investments and equally massive share shift in the midmarket segment. And let me be clear those margins were similar or better than the large segment margins as the glass selection are of similar complexity. At the same time, we funded investments in all major factory processes to whilst the launch new coatings and 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 project have less value added attributes to the glass. A mix of lower price in 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 than glass and mere fraction of what it was at Apogee to seven 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 while 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. We have a national footprint executed locally and our lives are substantial. Our stated strategy for over five years has been to smartly manage the order profile of this business to let our project management capabilities and capacity drive the bid process and do 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 what 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 fault Apogee. Here, 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. Your line is now open.

So can we just start out with EFCO obviously the guidance for I want to make sure I got this right, I think breakeven for EFCO in fiscal 2019, kind of when you guys are now in the business what's going on maybe you can just give some greater clarity and color on why I guess profit expectation 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 skies in areas that they weren't familiar with on large curtainwall projects. They in hindsight underestimated the cost and execution complexities of that as we've got 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. We put the resources in place as these projects revenue throughout fiscal 2019 we’re going to feel the force 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’ve put resources into EFCO to help them migrate to the kind of business they should be and to have them focused on what they've always been good at which is window work. And as I mentioned in my comments, I put it a new President in. He has been one of our named executive officers at Apogee in 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 the last few months. There is definitely a downward slope to their order - their inbound order work. These large projects that we’re contributing to poor financial performance we’re 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 our 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 2019.

And maybe going to kind of bridging that over to the guidance for fiscal 2019. So I think the implied midpoint of your EBIT margin or operating profit margin let’s call it 9.3/9.4. You did 10 this year so down about 60/70 basis points. You know three months ago you guys were saying triple digit basis point margin expansion so there is swing there in a three month period of roughly 160 basis points and so I’m curious is there way to breakdown what has changed in the guidance over the last three months, how much is related to EFCO of the 160 how much is related to inflation, how much is related to competition if there is kind of large buckets that you can provide us I think that will be helpful?

The primary bucket is a change from an expectation that we are having of improving EFCO to be mid single-digit operating margin to be in breakeven. And really from the visibility of the initiative that we identified the time that it is 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.

And maybe if I can just sneak one more in. Jim you mentioned the 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?

First of all if I 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 has been a lot of movement recently on the primary risk factors aluminum and the London Metal Exchange has been down. The Midwest premium has been up there has been a lot of noise it was somewhat the de minimis. The recent conversations around the Russian oligarchs really did turn a little more turmoil but we've been able to continue to price to offset the inflation in our aluminum site. It would be foolish to not highlight risk, we do not intend to turn our tax reform benefit into lower pricing but Sam we had lot of competitors that aren’t public company. 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 costs in the form of price decisions. So this is not been the historical case, it has been for the last couple 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 that the framing system segment and primarily of aluminum more so than the other factors. And as Joe said, over the last two years we’ve seen the industry be quite disciplined in terms of pricing and we continue to from what we can manage or 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 in the last two years continued.

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 there is alarm for everyone we all expected it to be actually directed at one country that's primarily coming to 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 risks. I’m 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 would try take advantage of the rhetoric that's going on, but the reality of matter is the tariffs do not affect most of our of our supplying countries Sam.

Our next question comes from the line of Chris Moore of CJS Securities. Your line is now open.

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?

Yes, a little bit so they do they will have a relatively small amount of revenues may be 10% of their revenues are going to be lower margins than their overall exhibited.

If you look at the backlog just kind of on a - put into two buckets between fiscal 2019 and fiscal 2020, can you give a kind of rough split?

Are you talking about in terms of how much of the backlog is expected to go fiscal 2019 versus 2020?

Correct.

Yes, I think about two-thirds of it is fiscal 2019 and about one-third is fiscal 2020 and beyond.

Chris, a fourth point I’ll add is virtually all of fiscal 2019 plan revenues in that segment are in hand. Now 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 revenue some of it in the year. The business is for the most part fully revenued for fiscal 2019 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 comment 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.

That 25% - that just this four or five levels that you’ve talked about overall in terms of from back…

We’ve always shied away from adding more non-GAAP metrics but if you add the book backlog to awards we’re up about 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 we’re the sole glass bidder and we have work we’re bidding those four levels of visibility often talk about. The first two are the most concrete and that's when I’m talking about when I say we’re 25% ahead of last year.

And on the glass side you’re talking about one of the things expanding into broader architectural glass markets. Can you just talk about 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 building is going up. There's a lot more interior glass and years ago glass partition, glass railing, glass walls versus the traditional cubicles and we believe we can have larger share of that. And being more competitive in the - as we move downstream in the mid and smaller projects world.

And would you anticipate the margins there or relatively the same as on the outside or is …?

The margins on the interiors versus margins on the outside, yes, I don’t see, there’s no margins 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 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. Your line is now open.

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

Yes. Eric, I’ll try to address today. I admit, I did a poor job last quarter, I guess, it came out more price competition. That was not true. But today what I’m explaining, 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 attracted as the large projects. And that was the case for all of F 2017 and halfway into F 2018 and we made the largest gain in our share in the mid market, meaning smaller projects in fiscal 2017 where we had record earnings and record operating margin. That trend continued into 2018. 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 to the less complex project. It doesn't mean we had lower prices, but we are now playing in a world where the glass content was less value-added. The competitors has been necessarily lower price either but it’s 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 margin in that business. Unfortunately we continue to lose revenues in the large projects. Frankly it was revenues that were loss to the award a few years earlier, but that trend has turned around so we feel good. So, Eric, I hope I explain it better today with regards to - it wasn’t so much more competition as us continuing to step downstream in the less complex projects.

I mean, just sticking 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 you know the situation now, you’re starting to see some regaining of share there. Is that something that you feel like has some legs?

I do.

Okay.

I do. You know, some of the largest installers in the country were the first to try to save a dollar by going offshore fatigue definitely set in. We had great competitors around the world along logistics supply chain on one percent of the construction cost of the building is a very risky model and it comes with unanticipated cost downsides that aren’t easily attributed back to the glass per se. But as our valued customers experienced all the efficacies of that long logistics supply chain, they started coming backward, frankly, even before the currency move to our favor. So, the same people I didn’t give up work for a few years have been bidding with us again and avoiding this work. And we won some projects against international players recently where we just couldn't be competitive at $1.05 per euro just two and a half years ago. So yes, I do feel there are legs on this and - but we’re running our business model will 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.

Last question from 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 I mean, 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 system business for the foreseeable future. I’m not going to tip my 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 Instructions] Our next question comes from the line of Brent Thielman with D.A. Davidson. Your line is now open.

Maybe on the glass side, Joe, do you still expect to grow in the midsize market in fiscal 2019 or is that going to take a backseat kind of topline headwind as you shift more towards kind of large project?

No. We have capacity to grow. We expect to continue to see upward movement in the midsize segment. We don’t feel that we’re tapped out. And frankly, if you went back to the last downturn which we don’t ever expect to see prices like that, but our glass business, Viracon tried, because the large project evaporated. There was one large project in the United States back then 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 the four to five weeks that that segment requires. Our DNA was 15-week lead times for large projects. Today and for the last several years we virtually ship every single order in five weeks today consistently, because we put the automation in place and some of you have visited our factories. 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 high levels they’ve been.

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

And then the order activity you’re seeing in large project, is it back at through the pricing or margin level as you’d expect from this? This sort of job you were seeing at least few years ago?

Yes. The bidding activity is that - at good margins. There’s nothing going on. We haven’t seen any downward track in pricing or margins. I would tell you, I think in the large project, the term I would use is the end market continues to bump along the top. There’s no question - the large price 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 we’ll continue to bump along this high level of work in the large project for the foreseeable future. And what doesn’t always get captured in nonresidential is the continued strength in the multifamily high-rise buildings which for all intent and purposes is non-resi 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 home buyers 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 it bumping along the top for sometime in large projects and continue growth in the mid and small projects.

On EFCO, Joe obviously the transaction hasn’t played out as you initially planned and that was I mean since we’re looking at additional delays and kind of get into the targeted margin. So I guess, yes I'm looking for any sort of additional color that you’ve got that helped us feel like the risk is appropriately reflected here?

I feel the risk is appropriate reflected here for EFCO. We definitely had more surprises then we wanted and you expected that’s on us we said it today. We’ll believe we've now identified everything that we could with the business - it was a challenge. I got a new leader down there who is 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 and order profile. We’ve got the right leaders in place. We’ve 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 get out in front of their skies 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 business had.

Brent, I’ll just give you a couple of perspectives I mean since we put our - the current leader down there a little over 60 days ago. Some of the learnings for example, we’ve talked about low hanging fruit in 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 existing projects that have been started. And so delay in terms we’ve been 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 list of initiative as I articulated it just going to be put into place later than we really anticipated.

And lastly and similar of follow on to that I mean, I think if you go back over time and I think about your guidance practices and trying to be transparent with where you want to be from a financial perspective. You’ve done a great job, I think it easy for folks to kind of look recent history of guidance and be a bit skeptical about what we're talking about today. So I guess a two-part question be 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 based on 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 loft to not disappoint. I’m not going to go through another fiscal 2018.

We always look at risk and opportunities in the business as we come up with our outlook and I think we're taking a probably letting their risk aspect to 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, Takia 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 - apologize a lot of questions today and I certainly talk a lot more than normal. So I am going to wrap up now and just tell you, we look forward to a very solid year. I hope we got a 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.