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Apogee Enterprises Inc (APOG 0.13%)
Q1Â 2020 Earnings Call
Jun 27, 2019, 9:00 a.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Good day ladies and gentlemen and welcome to the First Quarter 2020 Apogee Enterprises Inc, Earnings Conference Call. At this time all participants are in a listen-only. Later, we will conduct a question-and-answer session and instructions will be given at that time. (Operator Instructions).
It is now my pleasure to turn the call over to Jeff Huebschen. Please go ahead sir.
Jeff Huebschen -- Vice President, Investor Relations & Communications
Thank you Andrew. Good morning and welcome to Apogee Enterprises fiscal 2020 first 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 a reconciliation to the nearest GAAP measures is provided in the earnings release we issued this morning and that's 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.
Joseph F. Puishys -- Chief Executive Officer
All right thanks Jeff. Good morning everyone. Thanks for joining our call today. The first quarter was a solid start for our fiscal year. We hit on our commitments, and our backlog is up. We're holding guidance and we're progressing on strategic initiatives while launching new ones which we'll touch on today. And finally we're pursuing cost recovery on the charges from the prior quarter. We saw a lot of work ahead of us but our progress is excellent.
This morning I'd like to share some perspective on what we are seeing in the end markets and discussed the highlights from the quarter and progress on some of our key strategic initiatives. And then of course I'll turn it over to Jim for more specific details on the quarter and our full year guidance. First the economy and market conditions. Let me just start with some observations about the economy in the end markets we play in. I continue to describe the overall market conditions in our sector as bumping along the top. A healthy environment in which Apogee can continue to grow. Underlying economic conditions remains stable, while economic growth has slowed a bit the U.S. is still averaged over 150,000 new jobs per month over the past quarter. And we continue to see employment gains in the office occupying sectors, education and healthcare. The most important market segments for Apogee.
Looking specifically at commercial office market, office vacancy rates are at decade low levels and rents are moving higher. Both of which point to continued demand for new office construction. Demand for multifamily housing also remains strong with new unit construction forecasted to remain at historically high levels in 2019. Additionally, the recent downward trend in interest rates should be supportive for new building products -- projects, I'm sorry. Of course there is some macro uncertainty in the market often overreacts to bad news but overall the economic situation is positive. We monitor the industry indicators like the Architectural Billing Index, the ABI as we call it. The Dodge Momentum Index and new construction starts. While these indicators have fluctuated a bit in recent months the long term trends have been favourable.
The AVI has been positive 19 of the last 20 months, 40 of the last 48 without the peaks and valleys and this is key to sustainable growth in end markets and stability. It's been flattish in recent months but we're OK with flattish. It's at stable healthy levels today. New construction starts also remain at a healthy level. I'd like to revisit a point I made last quarter while new construction has improved over a relatively long period of time the pace of activity has fallen short of previous up cycles and on a square foot basis construction activity and the non-resi sector still has a long way to go to reach prior peaks, and although the U.S. economic recovery is now approximately 10 years in the making commercial construction recovery is about half of that.
Also we're not seeing overbuilding or speculative building that might indicate top of market cycle. We continue to see a nice balance of new construction starts tied to tenant demand. The favorable economic and market environment is translating into solid demand for Apogee's products and services. We continue to build backlog especially in our Architectural Services segment. We booked several significant new projects during this past quarter. We're winning business across our geographic footprint and we're winning business in all of our key markets sub sectors based on customer commitments and our sales pipeline we could see further backlog growth for services in the second quarter, certainly depending on the timing of contracts. In our shorter lead time businesses customer activity remains healthy. We have good sales pipeline and we're seeing solid quoting and bidding activity. So overall we believe the market backdrop supports top line growth for Apogee this year and in the fiscal '21.
Okay, let's turn to our highlights and strategic initiatives. Looking at the first quarter I'll touch on a few key highlights. First, we made significant progress toward completing the legacy EFCO projects that we've been talking about in prior releases. The last remaining project proceeded as planned in the quarter and we're now several steps closer to the finish line. On this last project we are now more than 95% complete with manufacturing for the project which is being led by EFCO. We are more than 70% complete with installation which is being managed by our architectural services team. We expect to be largely finished with this project by the time we report our second quarter results and with some limited activity continuing into the fourth quarter typical of all commercial projects.
We also continue to work on potential cost recoveries that could offset some portion of the charge we recorded last quarter. I'm also pleased with the operational progress we've made at EFCO in the quarter. We're making headway on operational improvements and lead initiatives which are driving steady increases in key quality and productivity metrics. Frankly, EFCO had an excellent quarter. In the second quarter, we expect to complete a facility upgrade project at EFCO which will improve material flow out of our factory and allow further productivity inside the factory itself. This will positively impact results in the second half of the year.
In addition, we continue to take steps to drive synergies in the Framing Systems segment. Over the past several years one of our strategic priorities has been diversifying Apogee's revenue base to unlock new growth and to make the company less dependent on the more cyclical large projects segment of the non-resi construction market. Over five years ago I said our growth strategy in motion around driving better than market growth and our Framing Systems businesses by way of new product introductions, new markets and geographic expansion.
And I focusing at -- Apogee acquisition efforts in that segment. Our legacy businesses achieved amazing growth and bottom line results and we executed four acquisitions in this segment including a very successful product line tuck-in. We focused on expanding Framing Systems segment not at the expense of our other segments but because Framing Systems had the biggest opportunity for long term revenue growth and margin expansion.
Framing operates in a more fragmented market with numerous opportunities for growth through sheer, geographic expansion and new product innovation. The segment also offers substantial opportunity for margin expansion. We've executed our strategy through both organic growth and by making these key acquisitions to increase scale and add capabilities and framing. As we've discussed on previous calls, we inherited some unexpected problems with the EFCO acquisition which slowed our progress over the past two years but we are putting these issues behind us now and we're turning our full attention to realizing the margin and growth opportunities in Framing Systems with synergy efforts in both the revenue and cost parts of the P&L.
We will be taking concrete steps to drive synergies and reduce costs over the next several quarters. This will include increased supply chain integration among several of the framing businesses in sourcing some materials we currently purchase outside in other purchasing synergies. These actions will drive long term benefits or carry some upfront costs which will be likely incurred in the second quarter and Jim will talk more about that in his guidance comments. In the Architectural Glass we had a very strong year-over-year sales growth and margin expansion over the past three quarters, the Glass segment has averaged $100 million in revenue which reflects steady demand and improved throughput.
The new architectural glass growth initiative that I highlighted last quarter is also progressing as expected, and we plan to begin operations in our fiscal third quarter. I mentioned the strong order flow we saw in architectural services adding another $39 million to the segments record backlog. That has been the case in the past several years our services segment is focused on project selection, disciplined pricing and execution excellence at the job site, and this business continues to demonstrate amazing discipline and results. We're concentrating on those projects that best fit our capabilities and offer the best opportunity for solid profitability.
And the entire services team is focused on execution excellence through all phases of a project's lifecycle. Based on the schedules for projects and backlog we continue to believe the Services segment is well-positioned for revenue growth and even higher margins in fiscal 2021. And finally, our large scale optical segment is a well-run gem of a business that continues to deliver strong performance led by an amazing leadership team, with a strong leadership potential position. This segment always has quarter-to-quarter variability but on an annualized basis it generates consistent profitability and cash flow. Through the first quarter the LSO segment is on track to meet our full year growth plan and margin targets.
So Rob a good start to the fiscal year, we feel confident about how we're positioned for the remainder of the year. And with that I'll pass the call over to Jim, who will provide more details on the quarter and our outlook and then I'll take questions from you and wrap up with some final comments. Jim, you have the conn.
James S. Porter -- Executive Vice President and Chief Financial Officer
Thanks Joe. Good morning everyone. I'll begin with our consolidated results which you can see on page five of our earnings presentation. Total revenue grew 6% to $355 million compared to $337 million in last year's first quarter. Primarily driven by the significant growth in architectural glass.
Operating margin of 6.5% was in line with last year but down from adjusted operating margin of 7.4% in last year's first quarter. As a reminder, adjusted results in the first quarter of fiscal 2019 primarily exclude at the amortization of short lived acquired intangible, these intangible assets have now been fully amortized so there is no similar adjustment in the current fiscal year. EBITDA came in at $34.1 million compared to $35.5 million of adjusted EBITDA in last year's first quarter. Interest expense increased to $2.6 million from $1.8 million in last year's quarter on higher debt levels. And the tax rate of 24.4% was in line with our fiscal 2020 guidance of approximately 24.5%. Putting it all together earnings per share were $0.58 compared to $0.54 in last year's first quarter or $0.60 last year on an adjusted basis.
Now, we'll cover this segment results which are on slide six. Framing Systems revenue was $181 million up slightly from last year's $179 million. Operating income was $12.3 million with an operating margin of 6.8% compared to 6.9% last year and adjusted operating margin of 8.5% in last year's first quarter. The lower margin was primarily due to a less favorable project mix as we expected coming into the year as well as in lower volume leverage in a couple of locations.
Framing Systems backlog of $407 million held near a historically high levels. Our Architectural Glass segment had strong year-over-year improvement as the segment continued to progressed past the Workforce and Productivity issues that impacted fiscal 2019 performance. Gross revenue grew 30% through $100 million driven by strong demand and improved throughput in our factories as well as our weak prior year comparison. Operating margin improved to 6.4% compared to 2.1% in the first quarter of fiscal 2019, primarily driven by operating leverage on the increased volumes.
Glass segment margins in the first quarter were negatively impacted by approximately 60 basis points from the early start-up costs related to the new growth initiative. As we begin to hire staff and incur facility expenses for the new operation as we had expected Architectural Services revenue decreased to $65 million from $71 million in last year's first quarter due to the timing of projects.
Operating income was $4.6 million with operating margin of 7% compared to $5.2 million and 7.3% in last year's first quarter. As Joe mentioned services backlog increased to $483 million. The slide on page seven illustrates the strong backlog growth the segment has achieved over the past few years. Given current projects schedules established by our customers we expect almost 40% of services backlog will be converted to revenue in the remainder of fiscal '20 with the balance in fiscal 2021 or '22.
As Joe mentioned, at this point it looks like services is set up for another strong year in fiscal '21 and we continue to have a good pipeline of opportunities that could further increase backlog in the coming quarters. Large scale optical segment results were in line with our expectations with revenue increasing 2% to $21 million at the segment operating margin of roughly 20% first quarter margin in the Large-Scale Optical was below last year's level primarily driven by the timing of production schedules. In this small segment it is typical to see operating margin bounce around quarter-to-quarter. We continue to expect full-year operating margins in the 25% range that the large scale optical segment has achieved over the past several years. I'd also like to mention that as anticipated corporate expenses were higher in the quarter due primarily to increased legal and advisory expenses compared to fiscal 2019.
Now looking at our cash flow and the balance sheet. Turning to slide eight, operating activities in the first quarter used $9.7 million of cash. Cash flow was negatively impacted by our normal seasonal working capital uses timing of incentive based compensation and insurance basis payments primarily. Also as we mentioned last quarter progress on the legacy EFCO project continued to drive increased working capital which caused the roughly $15 million drag on operating cash flow this quarter. Capital expenditures were $11 million primarily driven by the investments for productivity in Framing Systems at EFCO and new capabilities in our Architectural Glass segment. Also during the quarter we repurchased 532,000 shares of stock for $20 million and we paid out $4.6 million of dividends. Total debt increased to $293 million or 1.8 times trailing 12 month adjusted EBITDA. Subsequent to the end of the first quarter, we successfully amended and extended our revolving credit facility. Extending the maturity out to 2024, increasing our credit limit to $385 million from $335 million and securing some favorable terms and conditions. The changes to our revolver give us increased financial flexibility and will also lower our borrowing costs.
We expect cash flow to improve in the remainder of the fiscal year but it will likely stay below last year's level primarily due to the increased working capital requirement until completion of the legacy EFCO projects. As a reminder we have continued efforts to recover some of the cost recorded in last quarter's charge. And any cost recovery is that we're able to secure we'll be favorable to the outlook for both cash and earnings. We continue to expect full year capital expenditures of $60 million to $65 million and will look to deploy excess free cash flow to pay down debt. We will also continue to evaluate opportunistic share buybacks.
Now, I'll turn to our outlook which is on page nine. We are maintaining the full year guidance that we provided last quarter. Let me offer some additional details on the outlook. First, in Framing Systems we expect revenue growth rates to improve in the second half of the year driven by project timing as well as easier prior year comparisons. We continue to expect margin improvements will be weighted to the back half of the fiscal year as we transition through a less favorable mix and the initiatives we have under way across framing systems begin to drive positive contributions.
The third quarter is traditionally the strongest quarter for Framing Systems which we expect to be the case this year. As we implement some new supply chain and purchasing synergy actions that Joe mentioned, we are expected to see some upfront costs which will have a roughly 100 basis point headwind to Framing System segment margins in the second quarter. This is expected to be offset by benefits in the second half of the fiscal year starting in the third quarter.
In Architectural Glass, we continue to expect full year revenue growth of approximately 10%. The first and second quarters will have the largest year-over-year growth rates due to the easier prior year comparisons. Also, we continue to expect approximately $4 million to $5 million a start-up costs for the full year for the new Architectural Glass growth initiative which will reduce full year glass margins by a 100 basis points to 150 basis points. I noted that we saw some initial impact in the first quarter. These start-up costs will have the greatest impact in the second and third quarters and we'll begin to generate limited revenue in the fourth quarter. We expect this new start up initiative will ramp quickly in fiscal 2021.
In Architectural Services we continue to expect a 15% decline in the full year revenue compared to fiscal 2019 due to the timing of projects in the backlog. And as we discussed last quarter this will have a significant impact on the operating leverage and margins compared to last year as we cannot aggressively cut overhead costs that are needed to execute the segments robust backlog and project pipeline in the future. Based on the current project schedules we have we expect that second quarter will be the lowest revenue quarter and lowest revenue and margin quarter of the year for Architectural Services with performance gradually improving in the second half of the fiscal year. And finally in Large-Scale Optical we continue expect mid single digit full year growth in operating margins of approximately 25%.
With that I'll turn the call back to Joe.
Joseph F. Puishys -- Chief Executive Officer
All right, thank you Jim. To wrap up this was a nice start to our fiscal year. We're making good progress in a number of areas that should position us for further top line growth, improved margins and stronger earnings and cash flow for the remainder of the year. Looking longer term healthy market conditions our backlog in our pipeline of operational improvement initiatives set us up for continued revenue growth and margin expansion in fiscal '21.
I'd like to end where I started that being the end markets. There's a lot going on in the world and there are many geopolitical worries today but there are many things going very well in our economy unprecedented low unemployment, strong business confidence, still very low inflation and very favorable interest rates through a lot of things going right in our end markets, we feel good about it but as you've heard today we're putting a substantial laser focus on cost and cost actions at Apogee.
So with that I thank you for listening to me today and I'd like to ask Andrew our operator to open the call up for questions. Andrew?
Questions and Answers:
Operator
(Operator Instructions) Our first question comes from the line of Chris Moore with CJS securities. Your line is now open.
Chris Moore -- CJS Securities -- Analyst
Thank you. Hey, good morning guys.
Joseph F. Puishys -- Chief Executive Officer
Hey Chris.
Chris Moore -- CJS Securities -- Analyst
Good morning. Maybe we just start with Framing, obviously most of the conversations is around EFCO. Can we just maybe talk a little bit about the core framing business. How the margins are looking there?
Joseph F. Puishys -- Chief Executive Officer
Sure, Chris. This is Joe. I'll talk about it. I mean, we continue to see good performance across our framing systems businesses and we have some timing quarter-to-quarter but overall our core businesses are continuing to perform well.
Chris Moore -- CJS Securities -- Analyst
And the -- maybe could you just repeat we had literally the 100 basis point impact in Q2 Framing is related to EFCO or just go again quickly?
Joseph F. Puishys -- Chief Executive Officer
Yeah, I know. So really -- what we're really trying to step up -- sorry in the second quarter is a real increase in some of our supply chain and purchasing opportunities across a number of our Framing Systems businesses which is really looking at how we got optimize our supply chain from extrusion and finishing as well as do some insourcing we've been frankly through some of our productivity initiatives, we increased some capacity that's enabling us to do some insourcing where we've been purchasing some extrusion in fantasy and services on the outside, we'll be able to bring some of that in-house.
As well as we're launching on an expanded effort to drive procurement savings really across the company which is concentrated within our Framing System Segment. So, a lot of activity we've been working on a number of these initiatives but we're really putting our foot on the gas in the second quarter to get these going, and there's just some initial cost to get them in place.
Chris Moore -- CJS Securities -- Analyst
Got it, that's helpful. And just in terms of the Glass market can you talk maybe a little bit further about what you're seeing kind of large buildings versus midsize and where the growth is coming from? What are you seeing these days?
Joseph F. Puishys -- Chief Executive Officer
This is Joe. Chris I'll take this one now. We're seeing consistent in markets, the term I continue to use and has been take -- it stole from somebody many years ago. Somebody stole from me recently is that we're bumping along with that, and we're seeing good bidding, and projects advancing in office, healthcare, education. I would say no one sector in multifamily housing. No one sub-sectors really a standout or a laggard. It's healthy, the construction sites are full. So, we tend to have these ebbs and flows that are often driven by the -- perhaps over subscription of work at the construction site. So you have a couple of quarters where maybe projects, don't enter the contract or the backlog, the stats as you thought but right now I would say there's probably more work trying to manage the schedules than there is concern about the end markets. So it's consistent across the sub segments frankly and across the U.S.
Chris Moore -- CJS Securities -- Analyst
Got it, Helpful. Last question from me, just in terms of the new Glass initiatives, anything else that you can say on that at this point?
Joseph F. Puishys -- Chief Executive Officer
Not really. And I'm sorry for that, we just stuck to the financial impact for now the project is progressing. I expect revenues to begin -- we'll be certainly begin in the second half of the year. I think by the time we report on our second quarter earnings we will actually be in production and we'll probably be able to talk about a little bit more in 90 days, but nothing is -- everything has progressed as according to our plan when we announced it to you all 90 days or whatever it was 65 days ago.
Chris Moore -- CJS Securities -- Analyst
All right, appreciate it. Let me jump back in line guys.
Joseph F. Puishys -- Chief Executive Officer
Thanks Chris.
Operator
Thank you. And our next question comes from the line of Eric Stine with Craig-Hallum. Your line is now open.
Eric Stine -- Craig-Hallum -- Analyst
Good morning everyone.
Joseph F. Puishys -- Chief Executive Officer
Hey Eric.
Eric Stine -- Craig-Hallum -- Analyst
I just want to start with Glass, obviously a very good quarter. I mean is this something where we should view a lot of the hiring challenges and some of the operational things as being in the past that you've turned the corner there or are there still some things in progress and if there are maybe an update on where all that stands?
Joseph F. Puishys -- Chief Executive Officer
Yeah, thanks. Eric it's an ongoing process. We have definitely made good progress. We have enough people in place to run the business effectively. We'd like to add more, we could remove some overtime and improve our margins a little bit. The issue we had a year ago was, we just couldn't keep up with production demand. Now, we're able to keep up with demand still a little bit of cost opportunity. The labor markets remain tight. It's a challenge to hire new people and particularly in the region where they're -- our largest factory is, but we have the people who get the production out. We have a little more opportunity and they continue to make progress every quarter.
And the first quarter was a bit of a transition, we don't hear us complaining about weather again but it was a challenging weather environment. Even in our fiscal first quarter here remember our year started in March, March and April were brutal out here. So throughout the quarter we improved productivity at our Glass business. May was the best month of the quarter and we've come out strong in June operationally. So again I will end where I started, it's an ongoing process. We've got enough people. We'd like to have a few more and we continue to do some creative things to find talent.
Eric Stine -- Craig-Hallum -- Analyst
Got it. Okay, that is helpful. And maybe just a follow-up on the previous question. I mean, I'm not going to ask details necessarily about the new Glass initiative but I mean, anyway you can maybe frame -- in fiscal '21 you expect that -- I believe Jim said a contributor and potentially a significant contributor. So, anyway you can kind of frame the magnitude of that from a high level and then is there anything different about that initiative that would change kind of your long term operating margin outlets to that segment which I know you shoot for 10% plus?
Joseph F. Puishys -- Chief Executive Officer
Yeah. Eric, I'm sorry. I'll have to be a little bit careful. I don't want to start providing guidance for fiscal '21. Gentlemen, I will be doing that obviously at some point in later in this fiscal year. This project certainly bodes well for helping us with revenue at -- I think margins directionally similar to the potential of that business today. It gives us good leveraging on our fixed. It helps us someday when perhaps there are headwinds in the end markets. We'll be happy that we've made this investment. It will contribute to upside in fiscal '21 and we'll just have to hold off until we provide segment guidance later this year.
Eric Stine -- Craig-Hallum -- Analyst
Okay. Got it, thanks a lot.
Joseph F. Puishys -- Chief Executive Officer
(inaudible). Thanks.
Operator
Thank you. And our next question comes from the line of Brent Thielman with D.A. Davidson. Your line is now open.
Brent Thielman -- D.A. Davidson -- Analyst
Thanks, good Morning.
Joseph F. Puishys -- Chief Executive Officer
Good morning, Brent.
Brent Thielman -- D.A. Davidson -- Analyst
Hey, Jim. Do you have what the impact of the start-up costs were for this first quarter?
James S. Porter -- Executive Vice President and Chief Financial Officer
Yeah, it was -- yeah, so in our capital Glass its about 60 basis points of the impact.
Brent Thielman -- D.A. Davidson -- Analyst
Okay. And, I am trying to think of the puts and takes through the year, I know you're going to have kind of more amplified impact here in the 2Q, 3Q? Should that be offset by better productivity just given all the other things you guys have talked about such that maybe we see sort of stable margins here over the next couple quarters and that picks up and fourth you, is that the way to think about it?
James S. Porter -- Executive Vice President and Chief Financial Officer
I mean, they will still be a bit dilutive in Q2 and Q3. Those are going to be much heavier in terms of the impact of the over 100 basis points impact in each of those quarters for this segment, but the core business itself we're in as I mentioned in the prior question that Eric asked the Glass business, the momentum on its productivity in its traditional business we, expect continued productivity improvements. That's in our guidance for the year but the project you're asking about will be cost headwinds for a couple more quarters.
Brent Thielman -- D.A. Davidson -- Analyst
Got it. Okay, and then on the services business obviously you know very robust environment maybe can talk a little bit just about that the terms, may be evolution in terms you're seeing on some of these new contracts, you're signing as it relatively tight market out there?
Joseph F. Puishys -- Chief Executive Officer
No changes in -- terms and conditions on the projects we're working on. I mention I'm most proud of that business for their disciplined approach to project selection and then project execution. It's all about getting your estimates right. I think, we're the best in the industry frankly and yet that and then of course we have to execute at the job site where we're doing the fab assembly glaze in our factories and at the construction site itself. Nothing changing I would say on the contract we're all been bidding this healthy competition out there we've got great competitors but we're a great competitor as well and I think we're winning our share more than our fair share of projects. It's a very, very fragmented market. This is a great business for us. We're one of the bigger players and we have a fraction of the end market. So there's a lot of work to select and compete against and I think we're seeing consistent bids on margins and terms. So, sorry nothing exciting changing on that.
Brent Thielman -- D.A. Davidson -- Analyst
That's OK. Maybe last question you talked a little bit about it, Joe I know you don't like to blame weather but obviously it's been some pretty tremendous things happening out in the Midwest is that continues -- is that having a material impact on the business or the customer base that you serve out there. May be if you just talk about that?
Joseph F. Puishys -- Chief Executive Officer
Nothing to call out Brent, we feel terrible for people that are impacted. Our facilities have not been impacted, and when you picture that kind of work we're doing we're not -- there's not buildings going up where we're seeing some of the devastation due to this really bizarre weather pattern hitting parts of the U.S. So it's unfortunate as we've been fortunate as not really impacted our company.
Jeff Huebschen -- Vice President, Investor Relations & Communications
In our smaller projects Framing System segment as I think everyone's aware rain is just been a really significant issue and it's not enough for us to call off but it's probably affected the timeline of certain project, where our constructions activity gets delayed and moved down a little bit particularly in our smaller projects business but --
Joseph F. Puishys -- Chief Executive Officer
What I call that was -- kind of a severe winter weather, kind of continue to provide challenges for our productivity recovery at our Glass business, Viracon, a little bit again not calling it out but it is certainly glad that winter is behind us on to our Glass momentum just kicking up again.
Brent Thielman -- D.A. Davidson -- Analyst
Okay, great. Thank you.
Joseph F. Puishys -- Chief Executive Officer
Yeah. Thanks Brent.
Operator
Thank you. And our next question comes from the line of Jon Braatz with Kansas City Capital. Your line is now open.
Jon Braatz -- Kansas City Capital -- Analyst
Good Morning Joe, Jim.
Joseph F. Puishys -- Chief Executive Officer
Hey, Jon.
Jon Braatz -- Kansas City Capital -- Analyst
Joe, has the problems of at EFCO become more of an item of the past. How would you view the opportunity the potential at EFCO relative today -- relative to your expectations originally when you acquired it. And, what about the timeline of realizing that potential. Can you talk a little bit about that?
Joseph F. Puishys -- Chief Executive Officer
Yeah, we -- yeah, sure John, thanks. Yeah I -- the potential for that business is amazing. It's very -- it looks very much like what we have often called our legacy. The three businesses in this segment that existed when I arrived here. They do the same finishing extrusion window and wall production and sales similar end markets a little more diverse customer base which we like. We stated this would be a double digit operating margin business.
Our starting point was lower than we thought when we did the acquisition. As we said we're getting the problem projects out from under. Apogee has been a tremendous help. Jeff, go for that they'd be the first to admit it. We put some new people in place both at the top in operations, in sales, we've got a great core team that had great experience in engineering and estimating. So, that business is now on its way to that double digit hike. I would say over the next three years, I certainly expect to break that barrier and I'm looking for a few hundred basis points of margin expansion every year from that business. Q1 was -- as I mentioned they had an excellent quarter.
Frankly, I was very happy with the business performance. I told the team that as they got out from under, a couple of these really problem product were a book just about the time of prior acquisition that they would see amazing momentum and they're seeing it. And as I mentioned we're that business which has been -- we took the project management and installation away from them on these particular projects we've called out. Turn that over to our experts and the services, they focused on manufacturing quality units which they've done they're almost done and now their full attention is working on productivity. I mentioned a nice project we approved a year ago. This, tomorrow we actually start to put into a live operation this improvement in our the back end of manufacturing for primary -- our chipping automation so that business will continue to drive momentum. My goal is to get that above 10% over a three year horizon. My starting point just got pushed back a year or two from my original expectation. It's a gem of a business, and it fits nicely with the rest of our Framing System segment.
James S. Porter -- Executive Vice President and Chief Financial Officer
And Jon, it's Jim. I just want to emphasize on Joe's point because I think your question was spot on. We've been talking about the benefits that we see getting this legacy project behind us. And I think a little bit in the fourth quarter and as we talked about in the first quarter I think getting that largely behind us has really allowed us to have the visibility of the -- momentum of that productivity improvements that we've been working on.
Jon Braatz -- Kansas City Capital -- Analyst
Okay, Joe -- Jim I think I know you mentioned that I think you're putting another $10 million. I think it was $10 million into EFCO. To get to that double digit, will it require additional investment capital investment, do you think?
James S. Porter -- Executive Vice President and Chief Financial Officer
No, I think -- no -- this was a big investment we identified that went before we even bought the company. Frankly, the business that identified it, this was important the prior owners were not going to make that investment. We've made it, going forward the traditional tooling, perhaps some CNC investment everything that would normally fall into our operate, maintain and productivity projects. Nothing that I would call out as a substantial investment like this one.
Joseph F. Puishys -- Chief Executive Officer
Yeah. Any large investments that we would see, I would anticipate them to be driven by productivity that would pay for themselves.
Jon Braatz -- Kansas City Capital -- Analyst
Okay. All right thank you very much.
Joseph F. Puishys -- Chief Executive Officer
Yeah, Jon thanks. Appreciate the questions.
Operator
Thank you. And our next question comes from the line of Julio Romero with Sidoti Company. Your line is now open.
Julio Romero -- Sidoti Company -- Analyst
Hi, good morning.
Joseph F. Puishys -- Chief Executive Officer
Good morning. Hi Julio, how you are doing?
Julio Romero -- Sidoti Company -- Analyst
Very good. Can I ask about the increased focus you're putting on procurement in the Framing business. Maybe if you can just talk about what kind of margin opportunity you see there and if -- there are any similar opportunities across any of your other businesses?
James S. Porter -- Executive Vice President and Chief Financial Officer
No, this is Jim. I'll address that. So first of all when -- when we acquired EFCO, yeah one of their low hanging fruit opportunities we saw which specific to the EFCO business and leveraging similar vendors and purchases in those types of things with that business which we went after upfront. What we're doing now is redirecting and taking a broader look at the entire Framing System segment as well as across Apogee and frankly we've engaged some outside resources to really accelerate and drive focus on this effort. That we think is going to really help us. And we're looking at everything we're looking at direct materials, indirect materials and kind of all categories of spend. Really, just launching this more focused initiative and, it's too early now to really call out what we think the margin impact is but we think there's a lot of opportunity for us as we really take a more holistic focus on driving materials, energy benefits across our supply chain.
Julio Romero -- Sidoti Company -- Analyst
Okay. That's helpful. And, since you mentioned, you do expect improved revenue in margins in the services business in fiscal '21. Can you give us any color on maybe what the margin profile for the work there looks like for 2021? And if the projects schedules can point to maybe cadence offerings in that segment?
Joseph F. Puishys -- Chief Executive Officer
Well, yeah. Well, let me take it first and Jim can pile on. Again I'll repeat we're not providing guidance for fiscal '21 today. The backlog for this business kind of speaks for itself. We know, we certainly call out the backlog in our queue which goes out I think next week. It is $39 million higher than it was at the last earnings release. That was a record I mentioned on the call today. I choose my words carefully because I can't guarantee a backlog increase in Q2, but if orders go into contract as I expect we will have increase in backlog in the second quarter. But, I always hedge my bet on that, but it's -- the work in that business is strong. So, it's mostly at -- I don't think there's a significant movement in margins. It's good business, it's business that we believe we can execute well and it'll be primarily driven by volume leveraging next year, but as far as year-over-year revenue growth guidance we're not prepared to do that today.
James S. Porter -- Executive Vice President and Chief Financial Officer
Yeah, really well -- what we've commented on is again based on that visibility of the work that we have -- with all the caveats over, it all depends on what the time you have the actual flow is in the actual project execution, but what we see today -- we have visibility with that fiscal '21 has the potential to perform similar to fiscal '19 for the Architectural Services segment. Because it's such a big business for us that provides lumpiness. I wish I -- as a public company I wish I could report that business on a two year basis. If we had an amazing fiscal '19, a record year across every metric, and we get our backlog today is stronger than it was -- at this time preceding that record year. Okay, so you get frustrated well, why can't FY '20 be another record instead. It is just the timing of the way projects book, we're in the construction world and I ask -- you to have a two year look at it as well. It is performing well and we'll have a very, very sound fiscal '21 based on our current backlog in view of the work we're continuing to put in backlog.
Julio Romero -- Sidoti Company -- Analyst
Okay, that's helpful and I certainly appreciate the color there. Just last one for me is, you amended a credit facility gives you some better flexibility and you also repurchase some shares which is certainly encouraging. Can you just kind of outline what you see your capital allocation priorities are going forward? Thank you.
Joseph F. Puishys -- Chief Executive Officer
Sure. I mean our first priority is continuing to look at attractive investments back in the business from a capital perspective. Our dividend remains important. I think we're looking at using excess free cash flow to pay down debt so we will continue to evaluate share repurchases. M&A is still really back burner for us as we are really focused on driving the margin improvement in our business.
Julio Romero -- Sidoti Company -- Analyst
Helpful. Thanks very much and good luck in the rest of the fiscal year.
Joseph F. Puishys -- Chief Executive Officer
Thanks Julio.
Operator
Thank you. And our next question comes from the line of Bill Dezellem with Tieton Capital. Your line is now open.
Bill Dezellem -- Tieton Capital -- Analyst
Thank you. I actually would like to follow up on that last question. To start with, the increased credit facility. This is solely for flexibility of running the business from a working capital perspective where you have additional initiatives on M&A, but whether it be something like what you're doing with Frame or something like Glass initiative that you are giving yourself extra flexibility forward that you already have some visibility that you're going to be putting these initiatives in place. Can you talk to that please?
Joseph F. Puishys -- Chief Executive Officer
Let me give a macro and then Jim will give you the detail. Clearly, it is not to support M&A as Jim said that obviously I'll repeat it. It's certainly a back burner for us. It was a good time to lock in more favorable terms and reset the clock for five years. Who knows what will happen in the end markets. We're in a strong position to get these terms, but it wasn't for any specific need. Jim?
James S. Porter -- Executive Vice President and Chief Financial Officer
Yes, so I'll just expand it. I mean, it really is all driven by increased flexibility given by working capital and CapEx, but then in addition in terms of -- it's got some differences in that structure Bill, that actually allow us over the term of this revolver to adjust the sizing of it to and, yeah with the expectation of our good cash flow generation over the next two years. You even have increased flexibility relative to managing their commitment level.
Bill Dezellem -- Tieton Capital -- Analyst
Great. Thank you. And then I would like to shift to the training initiative on the supply chain front that you have. So I understand that it's in what you're doing is to improve margins longer term. I don't understand why you're having the impact -- the negative impact on margins here in the second quarter which you talked about kind of the business activity that's leading to speaking to those headwinds in Q2?
James S. Porter -- Executive Vice President and Chief Financial Officer
Sure. Bill, this is Jim and I'm not going to go into too many details here but it's really two things. One is, I mentioned that we're going to need some outside resources to help accelerate our focus on some purchasing initiatives. And so there's going to be a little bit of upfront costs associated with that. And then as we look at rebalancing some of the operational activities there's just really normal expenses associated with some of those activities within our businesses that's been prepared for us.
Bill Dezellem -- Tieton Capital -- Analyst
Okay. That sounds like one, I'll take off offline to understand better. And then my final question as we look out to next year, and I recognize you don't want to provide guidance. However, I would like to think about the fiscal '21 conceptually you've talked about the service business having higher revenues and profitability next year. The Framing business will no longer have to add EFCO projects, the stage will be complete which will then give them with an opportunity to shine and that show a returns right. Some upfront revenue growth and the new Glass initiative will also be above trend revenue growth. To put all that together that implies -- that next year we should be setting ourselves up for something that is an above average level of earnings growth beyond what one would normally expect. Is there something that I'm missing with this thought process?
Joseph F. Puishys -- Chief Executive Officer
I do not believe you're missing anything with your thought process. We are larger project business is where we kind of have better visibility for revenue meaning working on a large project today that will revenue next year services obviously will be a strong year. Glass, what we see -- feel, what we feel that'll be a solid improvement, especially with the initiative we have, Framing Systems a mix of shorter lead time. Our focus there is cost productivity in our Large-Scale Optical business. I think we'll continue to perform at small. It'll continue to give us the cash and working capital help that it does. So, I don't think you said anything that I would take a take issue with.
Bill Dezellem -- Tieton Capital -- Analyst
Great. Thank you Joe.
Joseph F. Puishys -- Chief Executive Officer
Thank you, Bill.
Operator
Thank you.
Joseph F. Puishys -- Chief Executive Officer
Look forward to follow up.
Operator
And I'm showing no further questions at this time. So with that I'll turn the call back over to Joe Puishys for closing remarks.
Joseph F. Puishys -- Chief Executive Officer
All right, Andrew. Thank you guys. Thanks again everybody for joining us today. Certainly, I appreciate your interest in my company and I look forward to updating you on our second quarter performance and results in September and have a great day everybody. Take care. Thank you.
Operator
Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone have a wonderful day.
Duration: 53 minutes
Call participants:
Jeff Huebschen -- Vice President, Investor Relations & Communications
Joseph F. Puishys -- Chief Executive Officer
James S. Porter -- Executive Vice President and Chief Financial Officer
Chris Moore -- CJS Securities -- Analyst
Eric Stine -- Craig-Hallum -- Analyst
Brent Thielman -- D.A. Davidson -- Analyst
Jon Braatz -- Kansas City Capital -- Analyst
Julio Romero -- Sidoti Company -- Analyst
Bill Dezellem -- Tieton Capital -- Analyst
