Mary Ann Jackson - Director, Investor Relations and Corporate Communications Joseph Puishys - Chief Executive Officer James Porter - Chief Financial Officer

Samuel Eisner - Goldman Sachs Brent Thielman - D.A. Davidson & Co. Jon Braatz - Kansas City Capital Associates Scott Blumenthal - Emerald Advisers, Inc.

Good day, ladies and gentlemen. And welcome to the Apogee Enterprises Incorporated Second Quarter Fiscal Year 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions] As a reminder, this conference is being recorded. I now like to turn the conference over to Ms. Mary Ann Jackson. Ma’am, you may begin.

Thank you, Ben. Good morning, and welcome to the Apogee Enterprises’ fiscal 2016 second quarter conference call on Thursday, September 17, 2015. With us on the line today are Joe Puishys, CEO; and Jim Porter, CFO. Their remarks will focus on our fiscal 2016 second quarter and our outlook for the fiscal 2016 full year. 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. Our call also contains forward-looking statements reflecting management’s expectations based on currently available information. Actual results may differ materially. For information about factors that could affect Apogee’s business and financial results can be found in our SEC filings. Joe will now give you a brief overview of the results and then Jim will cover the financials. After they conclude, Joe and Jim will answer your questions. Joe?

Thank you, Mary Ann. Good morning, everyone. And thank you for taking time to hear our story. This was an impressive quarter for Apogee. Our operating margin of 9.3% for the quarter brings our year-to-date OM to 8.5%, certainly higher than our full-year historical high and validates one of our mid-term goals to achieve double-digit bottom-line returns. With our expected second-half performance, we will achieve that goal and believe that we will be at double-digits on the trailing 12-month basis no later than Q2 of next fiscal year. As I have said, we are already above our historical annual peak, well ahead of peak end markets. We now had 18 straight quarters of double-digit year-over-year operating income growth, 18 quarters, most of those in the range of 40% improvement or better. This most recent quarter is another example of that. Yet, you have already noticed that we achieved that on lower revenue growth than you likely modeled or assumed. Jim and I will get into the detail today of foreign-exchange headwinds, the tight schedules at construction sites in the U.S. and how they were impacting revenue. At $512 million, our booked backlog is as strong as it has ever been historically. An important note that you’ll see today is that a higher percentage of that backlog is for work in fiscal 2017 and 2018, a great sign for a continued end-market growth. I like how fiscal 2017 is already coming together right now. Let’s get into the quarter detail, and then, Jim and I will take a lot of your questions. As I said, Apogee delivered another strong quarter of earnings and margin growth. Our operating income grew 45%, and earnings per share of $0.50 were up 43% from adjusted earnings last year. Our gross margin improved 230 basis points to 23.6%. And our operating margin increased 260 basis points to 9.3% on improved product mix, pricing, cost and productivity. The strong operating margin of 9.3% underscores the earning power of Apogee as we leverage volume growth, cost management and productivity initiatives along with our focus on project selection. We are on a path of achieving our previously stated goal of double-digit operating margins. Our return on invested capital is now at 10.8%, up 390 basis points from prior year period. I’m also extremely pleased with our backlog growth to a near record high of $512 million. This level of backlog supports our targeted revenue growth this year and more importantly into fiscal 2017 and 2018. Since half of our backlog is scheduled to be delivered in the out years. In fact, if you compare our current backlog to the same time one year ago, we have $60 million more booked for the future years. I’d like to remind you, as Jim always does, that our backlog quarter-to-quarter is lumpy and our ability to grow is not dependent on quarterly sequential backlog growth. We make this comment even after very strong backlog quarters like the one just ended. Our revenue growth was 4%. But let’s peel back the onion on this. As noted in our press release, we are driving and achieving strong double-digit 15% growth in all of our U.S. products businesses, both large-scale optical and architectural, with our quality products and differentiated service levels. Impacting our growth were several factors related to our international businesses. Foreign-exchange rates, the slow economies in Brazil and Canada, and the strength of the U.S. dollars, which provide headwinds to international architectural glass sales. In addition, revenue growth was impacted by project timing in our architectural services installation business. We had projected lower growth for the install business as we focus on margin improvement and continue to expect full-year mid-single digit growth as planned for the architectural services segment. Before you ask, let me highlight that while this business was down $7 million year-over-year in sales it added over $40 million of higher-margin bookings into backlog. Our growth will come in the second-half. We continue to be focused on investing in businesses to improve productivity and competitiveness, as well as to extend product lines and penetrate new domestic geographies. Looking at the segments, we achieved top and bottom line growth in our products businesses. Architectural glass grew 10%, 14% in constant currency. The glass segment operating income doubled and operating margin grew 340 basis points to 7.3%. Our framing systems business, revenues were up 5%, 9% in constant currency. The framing systems operating margin was also up triple-digits, 230 basis points to a strong 12% operating margin, even with the Canadian headwinds. Our U.S. businesses are driving this excellent margin through strong operating performance, share gains and new product introductions that deliver further high-margin growth. We’ve also made a $17 million capacity investment in our finishing business that is ready to come online at the end of this month. At the same time, we were leveraging the success of our U.S. storefront business to drive improvements in our Canadian business unit. The large scale optical segment revenues were up 16% on strong sales of value-added picture framing product. We continue to see the U.S. custom framing market upgrading to our highest value-added products in that segment. The segment operating margin grew 360 basis points to 25.1%. Although architectural services revenues and operating margin declined year-on-year, their operating margins expanded sequentially by 100 basis points on lower level from the prior quarter. Our services segment is executing to their plan with the focus on margin improvement rather than growth. Their careful selection of projects is evidenced by a couple of hundred basis point improvement in margin in the work going into our backlog. Now, let me look at the – take you to the fiscal forecast for 2016 for the full year. We continue to expect the strong 2016 for Apogee with revenues of $1 billion and operating margins approaching double-digits as we close the year. In fact, the year-to-date operating margin is 8.5%, which is 20 basis points higher than Apogee’s historical peak annual operating margin. And we expect the second-half margin to exceed 10%. Construction site delays are shifting some work from 2016 to 2017, causing us to revive our revenue outlook to high-single-digits from the 10% to 15% in prior guidance. We are maintaining our earnings per share outlook of $2.10 to $2.25 based on the strong operating performance we’ve shown to-date. Our guidance takes into account the expected impact of project timing and construction site delays. Growth could be plus or minus depending on actual experience based on the customers timing themselves. Bidding activity remains very robust as evidenced by our near record backlog, with half the work scheduled for 2017 and beyond, fiscal years that is. Our high level backlog combined with commitments, bidding activity, award activity position Apogee for continued growth. We remain confident in our longer-term outlook for revenues of $1.3 billion at 12% operating margin in fiscal 2018. I’m pleased that our strategies to grow through new geographies, new products and new markets, along with great focus on project selection and productivity operational improvements are delivering phenomenal results. Jim will now take you through some of the details in the financials. Jim?

Thanks, Joe. I’m also very happy with our operating and earnings performance in the second quarter. Operating income grew 45% to $22.4 million, and operating margin of 9.3% improved by 260 basis points year-on-year and 160 basis points sequentially. Our earnings of $0.50 per share were up 43% from the prior year period adjusted earnings per share of $0.35. As a reminder, in last year’s second quarter, we reported earnings per share of $0.57, which included recognition of $0.22 per share for the tax credit that we earned with completion of a major investment in our Architectural Glass business. Our reference to adjusted earnings per share excludes that. Second quarter revenues were up 4% to $240.8 million, somewhat impacted, as Joe explained by project timing in our installation business, as well as foreign exchange and weak foreign markets for our Canadian and Brazilian operations. The foreign exchange impact on revenues from our operations in Canada and Brazil held down growth for Apogee overall by 230 basis points, while the impact on earnings was immaterial in the quarter. In discussing the second quarter revenues, we’ve also pointed out that we had double-digit top line growth in the quarter for our U.S. products businesses. This reference excludes revenues from architectural services, the architectural glass operations in Brazil, and the Framing Systems storefront business in Canada. I simply want to point out our continued solid growth in our targeted growth sectors. We achieved a strong gross margin of 23.6% for the quarter, up 230 basis points compared to the prior year and up 40 basis points sequentially. Compared to last year, we benefited from volume leverage, increased pricing, improved productivity, and a favorable product mix in our businesses, along with lower healthcare costs. I’d like to add some color to the quarterly segment results. In architectural glass, revenues were up double-digits and operating income doubled with improved volume, pricing and mix, as well as productivity in our U.S. operations. As we had projected in our outlook last quarter, both the top and bottom line declined sequentially, due to customer scheduled project timing. In the second quarter, the architectural services revenues and operating income declined year-on-year, largely as expected, due to project timing, as we’ve explained. Sequentially, the margin improved on lower revenues showing the progress we’re making in improving job profitability. As Joe said, we continue to have increased margins on new projects going into backlog, and for the full-year, we continue to expect that we’ll have revenue growth and margin expansion for this segment. The Architectural Framing Systems segment grew operating margins to 12% on 5% revenue growth. Our U.S. businesses are growing and leveraging volume with increases in pricing, mix, and productivity. Canada continues to be impacted by foreign exchange and the economy, and we’re working to improve operations in this challenging environment. The Large-Scale Optical segment achieved double-digit growth with strong sales of value-added picture framing products. We had a little easier comp to last year based on customer order patterns that were a bit softer in last year’s second quarter relative to the year. This year, we’re also seeing some growth in new products and new markets. This year, our improved product mix, along with strong productivity led to higher operating margin. Our second quarter average capacity utilization across all architectural manufacturing businesses was again approximately 80%, compared to approximately 80% in the first quarter, and about 75% in the prior year period. Our second quarter backlog was up $41 million from the first quarter to $511.9 million. The largest portion of our backlog is in our services business, where we are purposely tempering growth. The balance of our backlog turns a bit more quickly, so we can deliver revenue growth without requiring the sequential growth in backlog. That leads to my quarterly reminder that our business does have the lumpy order intake activity, and so we don’t require or necessarily expect that sequential backlog growth each quarter to be consistent with a longer-term trend and our expectations for top line growth. Our backlog mix at the end of the second quarter continues to reflect the strength in the office sector with a slight shift from institutional to office backlog in the quarter. The office sector increased to a range of 55% to 60% of our backlog, up from approximately 55%. The institutional sector is 25% to 30% of the backlog, compared to about 30% last quarter, and healthcare projects continue to be the majority of this sector. Multi-family residential, including high-end condos and apartments was approximately 5% to 10% of backlog, and the all other hotel, entertainment, transportation was 5% to 10% of the backlog. Regarding the timing of backlog, approximately $256 million, or 50% of our backlog is expected to be delivered in fiscal 2016, and approximately $256 million, or 50% in fiscal 2017 and beyond. This timing bodes well for continued growth in fiscal 2017 and 2018. In the quarter, we generated positive free cash flow of $31 million, nearly three times the $11 million in the prior year period. This improvement demonstrates Apogee’s cash generation potential. Our non-cash working capital was $77.1 million, compared to $97.5 million at the end of fiscal 2015. We continue to have strong day’s working capital management, with our days working capital improved three days over a year ago to 47 days in the second quarter. The tax rate for the quarter was 34.2% versus 34.0% in the prior year period on a comparable basis. Including last year’s $0.22 per share tax credit, we had a negative tax rate in last year’s second quarter. I’ll turn to our outlook. Our outlook for fiscal 2016 continues to put Apogee in a position to deliver record revenue and earnings results, because construction site delays are shifting somewhere from our fiscal 2016 into fiscal 2017, we’ve revised our revenue outlook to high single-digit growth from the previous guidance of 10% to 15% growth. We are maintaining our earnings per share guidance of a range of $2.10 and $2.25 per share. Regarding the timing of revenues for the second-half of this year, based on the current project schedules from our customers, we expect that the fourth quarter will be the strongest overall. At the segment level, we expect the fourth quarter will be better than the third quarter in Architectural Glass and Architectural Services, based on anticipated project timing, while the third quarter will be seasonally stronger for Architectural Framing and Large-Scale Optical. Overall, we do see tougher comps for the second-half of the year, compared to a strong second-half in fiscal 2015. We do expect that fiscal 2016 full-year growth rates will vary by segment. We anticipate that architectural glass will grow in the low-double-digits with mid-double-digit U.S. growth held back by weak Brazil market conditions. Architectural Framing Systems is expected to have mid-single-digit growth, with solid U.S. growth tempered by the slower Canadian business. Architectural Services is expected to have mid-single-digit growth in fiscal 2016. And for the Large-Scale Optical segment, we expect to see low- to mid-single-digit growth. We expect full-year operating margin to approach 9.5% for the year. This is in line with our expectations to deliver a trailing 12-month 10% operating margin in the first-half of fiscal 2017. For full-year fiscal 2016, we expect depreciation and amortization of $33 million. We obviously expect strong free cash flow for the full-year in fiscal 2016. Relative to our cash flow generation, our priorities for use of cash continue to be investing back into the businesses for capabilities, productivity, and capacity, and M&A, as well as maintaining our dividend. We’re actively evaluating opportunities in each of these to continue to pursue our strategic goals and increase shareholder value. We anticipate, our fiscal 2016 tax rate will be 34%. I feel really good about our results year-to-date and the performance trends that we see in our businesses. We expect a fiscal 2016 with solid revenue growth and margin contribution, nice cash generation delivering record results for Apogee. And with our outlook have strong end markets and the strategies we have in place, we also continue to believe we are positioned to deliver the longer-term goals we’ve outlined. Joe?

Thanks, Jim. As you’ve seen, we held our guidance for earnings performance on slightly lower revenues. The currency conversion issues from our foreign operations will likely continue into next year. But as Jim noted, this is more of a top line optic than a bottom line though it doesn’t help. The strength of U.S. dollar is making export business to challenge for all U.S. manufactures and we are no exception. We’re not simply hoping that the issue will abate. We are investing heavily in our operations to improve our competitive position and we’re just beginning. We plan to continue to make significant investments in our manufacturing cost structure. The fact that construction sites across the U.S. are very robust is a strong indicator for the end market growth, and it’s still have a lot of steam. The impact of delays at size, while an impact on timing this year bodes well for our fiscal 2017 plan. We have absorbed these headwinds and maintain our 50% income growth this year. As I said, I like our position for the next three plus years and look forward to delivering $1.3 billion top line and 12% plus bottom line as our next short-term milestone. With that, I’d like to take your questions. Ben, if you could open up the call for our participants to ask questions. Thank you.

Absolutely. [Operator Instructions] Our first question comes from the line of Samuel Eisner of Goldman Sachs. Your line is open. Please go ahead.

Yes. Good morning, everyone.

Hey, Sam. Good morning.

So with regards to the timing issue, wanted to dive into that a bit further. It seems across the board that the overall Architecture revenue, Glass Framing and Services were a bit lower than we were expecting. So want to really dive into this construction timing. How is it being pushed out? What are you guys seeing on the ground? What are your customers saying to you? Is it something about products getting to the site? Is it your products getting to the site? Is it other than – in the chain of building a buildings? Just want to understand that more completely.

Yes. So thank you, Sam. First off, there are no – we have not seen a single project cancellation, or actual start-up of project. We’re talking about projects underway. I think we saw when the economy in our segment and our sector came roaring back last year, we saw a plethora of orders come through. We saw glass lead times across our industry, including ourselves, skyrocket. I think the phenomena is a lot of construction sites put together aggressive schedules, as the reality set in, they maybe on the 30th floor instead of 40th, where they thought they’d be. It pushes back everything. Our deliveries are fine. Our lead times are as low as they’ve ever been, as fast as they’ve ever been in both glass and in our installation site. But there is no question the construction sites across the U.S. are full. So when there’s a delay at a site and the glasses isn’t needed for a month, or the installation is behind by a month, there is nowhere to go get that short-term order just because everyone is busy right now. So it’s certainly showing itself in our significantly improved margins in our installation business. Our performance in the glass business, it’s still up 14% in constant currency, Sam. It should have been higher. We probably had $5 million slip out of the quarter. We’ll have more than that slip out of the year, but we’re able to maintain very, very strong operating performance on that. So there has not been a single project cancellation, just the opposite. We’re seeing very robust activity. It’s just like the traffic. The highway on the traffic is full right now in anytime. There is an issue, it just backs everything up for miles. And but I can assure you, we have not had a single issue with delivery of glass or services on project site.

And to the point of that bottleneck, is it the fact that there are not enough – there’s not enough labor in order to move to the 40th floor in your example? I mean, what is that 10-floor delta that you were talking about? I mean, I guess, what is the main driver behind this delay? Is it just that there’s not enough people in order to get the products into the building? Is it a supplier issue? Just want to understand that more completely.

Well, it’s mostly overaggressive schedules from the contractors and owners, frankly, people are impatient. I think, the recession and the malaise in our end markets were long and drawn out. I think you guys heard me use words like two years ago, we’re no longer hearing about double dip were the ice is starting to harden, but it still – there’s too much tentative out, nature out there, people were slow to pull the trigger. And finally, last year, about a year ago, and I remind people in spite of our 1,100 basis point improvement in margin in the last four years, last year was the first year we got benefit of end market growth. But when it came, it came so aggressively that everybody tried to get to the in front of the line, and I think overaggressive schedules, number one issue. Labor, I wouldn’t call labor shortages, but clearly, you can – you read the unemployment numbers for the United States and in certain segments, it’s below 5%. And I would say labor is a secondary issue at site. But it’s mostly overaggressive schedules we’re dealing with.

That’s very helpful. And then just on the gross margin drivers on a year-on-year basis, I was curious, if you could parse out, I know, Jim, you ran through a few of those different components, but perhaps you can wait them. Are they each 25% of the gross margin expansion, or are they in the more of a lion share of that gross margin expansion, if you can comment on that, that would be wonderful.

Sure, Sam. I mean, I did go through the list and I think, first of all, there in order, but there really is a one element, because some of them vary a little bit business by business and you kind of see the highlights within the segment sector. But just take a quick look at it here, but I think, really was in order of, as I articulated, volume, pricing productivity, and product mix. And, as I said, it really was – there really wasn’t one factor that was materially different than the others, it was the combination of those.

If I can just sneak one more just on capital allocation, perhaps, you can talk a bit about the investments you needed for the cycle, in order to hit the guidance range, or at least the goal that you guys have given from fiscal 2018. What additional investments will need to be made in order to get that? And then how do you think overall about that – your growing cash balance?

Yes. Thanks, Sam, Joe, again. We’ve made, I believe, it’s safe to say, we’ve made the majority of the capacity investments we have to make. We added capabilities at our glass business, our largest business with the installation of the new quarter last year. I mentioned in my comments the capacity increase we’ve made in our finishing business, which has been a phenomenal performer within our Framing Systems segment. We’ve done improvements in our Canadian operations, including capacity. Our primary focus for the next few years is on productivity. I want to have a significantly better cost structure. I believe from peak-to-peak and trough-to-trough, we can be anywhere from 500 to 1,000 basis points better than we’ve been in the past. We need to have a better cost structure to achieve that. We’re on our way. Most of our investments now will be around productivity. I expect to continue to spend more CapEx than D&A for the next couple of years, because the paybacks are really phenomenal. And they’re geared to make us more competitive when the eventual downcycle happens. Right now, that’s in the future. But we’re doing a lot of planning for the – what might be five years out from now. And so, I would say, the focus is productivity and project selection as I said.

Great. Thanks very much. I’ll hop back in queue.

Yes. Thanks, man.

Thank you. Our next question comes from the line of Brent Thielman of D.A. Davidson. Your line is open. Please go ahead.

Hi. Good morning, Joe and Jim.

Hey, Brent.

Good morning, Brent.

Yes, in terms of the international business, Canada and Brazil, I got the numbers as of the end of last year. What are they now in terms of percentage of revenue?

Yes, thankfully, I’ll let Jim give you the detailed answer. Thankfully they’re a relatively small percent of our business, where actually performing well, but there’s no question they’re a drag. The currency movement on the Canadian dollar from just one-year ago was, depending on whether you use the Canadian dollar, U.S. dollar as the basis of your denominator, roughly 20% change in a year and in Brazil, it’s about 50%. So even now it’s less than 10%, the Brazilian business is less than 10% of the overall Glass segment. The market is crappy right now. You all know that, we’re still operating in the black. It’s not where we would have hoped for three years ago, because the economy is down and the exchange rate is really impactful. So even though it’s less than 10% of our glass business, it impacted 4% impact on the reported revenue growth of 10% versus 14% in constant currency.

And so, Brent, just in terms of the percentage of our total revenues of international, which is both in our Canadian Brazil operations as well as our exports out of North America, probably be this year in the neighborhood of above 8% of revenues and that’s down probably two to three points from last year.

Great. Thanks for that. And in terms of the site delays, just – and thanks for your previous response. Does weather kind of factor into that as well in terms of what we’re seeing this year and sort of getting these projects or for the process with any of your products?

Yes, Brent, I’ve seen some other quarterly reports come out and attribute some softness to the weather. We can’t blame weather. We really didn’t see any impact on weather in the quarter for any of our businesses. We had experiences in the past, in particularly our first winter with Canada, but this year is not an issue. It’s noise. But I would repeat that, a lot of our – we’d be – as we mentioned, we’re 15% top line growth in the quarter in spite – as reported, in spite of the currency issues in our products businesses. But our installation business was down significantly in the quarter. Most of it was planned. There were some delays, but most of that was planned. For the full year, we’re maintaining our guidance that we will grow in the mid-single digits in that segment, which means stronger growth in the second-half. And the bulk of our backlog increase, I mentioned over $40 million of our backlog came from the services business. A lot of that is in the future years, but they also have a lot of work to revenue. And our sequential growth in revenue on our services business will be significant as planned. So, long way around the barn, but weather did not impact our results.

Okay. And then, glass prices, obviously, gotten a little publicity here as of late. Can you kind of remind us how that impacts you in the short run and how you guys were responding in the marketplace in terms of what you’re seeing there?

Yes. We like everyone – we pass along those price increases. We have forward by commitments. We actually have – in spite of the glass capacities constraints, we are well supplied out well into the future. We price accordingly based on the increases. Typically, in our industry you get leverage if glass prices go up. You typically get a strong leverage on that increase. So, it is certainly not hurt us. We have great visibility. We are one of the largest glass fabricators in the world. We have correspondingly terrific relationships with all of our suppliers and we’re able to pass that on in the form of project pricing.

Okay, great. And one more if I could, just on LSO, Jim, you mentioned you had a little easier comp, but 16% growth is still pretty strong. Can you talk about maybe some other specific drivers of that growth, and what trends could kind of carry into future quarters that might benefit your growth rates in second-half of that business?

Yes, Brent, so, I mean, definitely there was a factor of comps, because as you know, a year ago just to remind you, we had the issue which is retailers who were placing their holiday purchase orders later than normal and so it kind of drove our second quarter down a little bit. So, that’s actually – but really the primary driver is just – we continue to move the end-market up to higher value-added products and that’s both from the commodity clear glass products into base value-added. But more importantly, as we continue to move their products just every step up into higher and higher value-added products, it obviously have better pricing and better margins associated with it. And then, while it’s a small piece of the business, you’ve heard us talking a lot over the past several quarters about new products and new initiatives. And we are seeing some nice growth even though it’s a small part of the business in whether it’d be the fine art and museum category or in what we’re calling engineered optics which is looking for, for example, electronic display applications or different applications like that. And that’s a real important focus for us long-term in this segment is to continue to deliver new products and drive growth in those new markets.

Okay. Thank you.

Thanks, Brent.

Thank you. [Operator Instructions] Our next question comes from the line of Jon Braatz of Kansas City Capital. Your line is open. Please go ahead.

Good morning, everyone.

Hey, Jon. Good morning.

Joe, you spoke about how strong your markets are, increasing backlog and so on. Can you talk a little bit about the prospects or the ability to raise prices at all in view of the strong markets? Is there any way you can take some additional price?

Well, we have been – when you read our results and you listen to the transcript, again as Jim mentioned earlier, we do as see reports, the driver is the gross margin. And I’m very proud of where we got our gross margin to by the way. We had pretty good results last year. We’re up 230 basis points in the gross line. We list them in the order of the impact, so you can see pricing is right up there with – after volume. We are getting good pricing in all of our business. Some of it comes from introducing new products at higher margins, more value-added products. Our end-markets are so robust now that there is no question there are pricing opportunities in our industry. It’s the nature of the beast. And we try to take advantage of the conditions and price competitively. Yet, we need to get paid for the complexity we deliver. I don’t think in the past Apogee got paid for the complexity it delivered and I believe we’re much better at it now and we put a level pricing excellence in the place to try to drive performance, so that we do get paid for what we are doing. And so, again, I’m long-winded, but I would say, yes, the end-markets are conducive to continued positive pricing.

Is there any way – as we look out and towards next year you might be able to put a number on what prices, what you think you could get in additional prices?

Yes, John, I don’t want to start projecting price increases for next year. I think it’d be inappropriate. Again, I would leave it at – our two largest businesses is glass. We typically are able to pass on price increases and then drive conversion to stronger mix through our influence with architects who love us and we love them. And in our projects business, it’s kind of hard to talk about price. You’re talking about something – a project that doesn’t compare to anything you’ve done before. But I can tell you, better selection and we’re doing. In our services business, the margins in backlog are up triple-digit basis points versus what year ago. And we continue to see improvements every quarter. I really like the selection process we have going forward. And that may not be calculated as price on a piece of paper, but for all – is it’s price.

Okay, okay, thanks. And then, lastly, in the LSO business, I know you initiated some new programs in Europe. You’ve talked about them in the past. Are you seeing any traction in that business over in Europe?

Yes, surprisingly the exchange rate with the euro and the dollar certainly not helped us. We have a U.S. cost basis and the euro movement has also been about 20% in the last year. We protected that business with some financial stuff. We do hedging. We got great delivery. We continue to see growth over there, especially in our fine art market. Again, it was a small business, but it’s gone from nothing to several million dollars and the team continues to do well. And so, we avoided any significant impact on the exchange rate with the euro headwinds. It’s – our folks have beat that down.

Okay, great. All right, Joe, thank you very much. I appreciate it.

Yes. Thanks a lot, Jon.

Thank you. Our next question is a follow-up from the line of Brent Thielman of D.A. Davidson. Your line is open. Please go ahead.

Hey, thanks, guys. In terms of the guidance, it looks like through a $30 million to $70 million is kind of coming out of revenue guidance this year depending on kind of what end of the range you use for the previous guidance range. I guess, what have you seen change that gives you the confidence your margins will make up for that and allow you to hit that EPS range? Is it basically what you put in backlog that’s got better margins than anticipated?

Yes. It is what’s in margin. I would say, I highlight 50 to 100 basis point margin improvement each year due to our lean and operational excellence initiatives. We are doing better than that this year. I said it repeatedly, when you grow 20%, it’s not easy to have really strong conversion because your operations are stressed. You have overtime, you’ve got new shifts, you’ve got new supervisors, you’ve got new employees. When you grow 10%, 12% in that range it gets easier and we should deliver better conversion. We deliver 80% conversion incremental profit on the incremental revenue to the business and which was why our total Apogee margins improved 230 at gross and 260 at the bottom line. And you saw the product segments all grew margin by 230, 340 and 360 respectively framing glass and LSO. It’s because of the operational performance and our ability to maintain and control our costs, with reasonable revenue growth. I think you’re right about the amount of revenue that range is accurate, that kind of pushed into next year and you’re seeing it in our, Jim gave the breakdown of backlog, I use the number of $60 million. If you compare this year’s backlog with last years and as I said how much of it was not for current year consumption, it’s $60 million more and last year we had phenomenal backlog increase in the second quarter. So, in spite of a very challenging comp from backlog growth, we did it again and we go into next year with a lot of revenue tailwinds from what’s in backlog at better margins.

Brent, I’ll just add two additional points. One is over the last couple of years you’ve heard that’s make a lot of comments about how we’re trying to position Apogee differently to operate throughout a cycle. And one of the things that we’ve talked about is being more nimble and verbalizing our cost wherever possible. And so frankly, as we did see one of the benefits of the long lead time business, as we did see some of these projects delay out of fiscal 2016. We did react in from a cost management standpoint in terms of really whether it be delay in headcount additions, adjusting our shift schedule on those types of things. And that factored into our outlook for the rest of the year. And Joe talked about our improvements with productivity, but then also the other difference has been the maintenance of lower aluminum input costs that we’re projecting for the rest of the year relative to what our outlook was previously, as the overall end markets have changed and we continue to see and expect, while some increases lower aluminum cost than previously.

Okay. Thanks, guys.

Thanks, Brent.

Thank you. Our next question comes from the line of Scott Blumenthal of Emerald Advisers. Your line is open. Please go ahead.

Thank you for taking my question.

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Jim, could you repeat the free cash flow number that you gave us?

For the quarter it’s about $31 million.

Okay. Thank you. And Joe, with a bit slower revenue guidance here and no change in EPS obviously, signaling a little bit better margin. You did mention that you’re expecting meaningful improvement in services. Should we expect most if not all of that margin improvement to come from improvement in services or should we get a little bit of that from somewhere else?

I think it will come across the board. I think we’ll see the strong revenue growth sequentially from services just because of the timing. I feared that the Street would overcook the results from services. We’re very transparent here, so you got to hear what we say, we don’t hedge the, the business did pretty much what we expect and was built into our plan, I can’t control what other people think we’re going to do but we’ll see definitely some uptick in that. But all of our businesses should continue to deliver strong revenues and our outlook has accounted for that. Jim mentioned, I mean, with some of the currency headwinds, which just currency alone forget about the end markets in Canada and in Brazil, 230 basis points of growth, but that didn’t really impact profit that much. So sure, it brought our top line number down a little bit, but it has de minimis impact on our income. So, it certainly helps us maintain our number, but that we were able then to offset and we absorbed all of these issues in our bottom line results through pricing, really great leveraging on the volume we did have and we did have high volumes, as I said 15% in our product businesses in the United States was pretty phenomenal.

Okay. And Joe, with regard to services business, understanding that we’re not going to get there or we shouldn’t expect to get there in Q3 and Q4. What’s your ultimate expectation for margins and where they can get in that business?

Yes. I’m not saying, Scott, that we can’t get there. We continue to hold our forecast for top line in that business and expect solid conversion, if you look at that business it had roughly about a 10%, if you compare quarter-to-quarter about a 10% deconversion, or meaning the incrementals only went down 10% on the revenue drop. That’s really solid performance for that business, and I expect it to perform admirably when we start to show revenue growth in the second half. My expectations are that business which will always be lower margin, it’s a very high ROI business.

Right.

It will be the lower end of the seven businesses, we have the four segments, below 10%, but it should be knocking on the door of 10% it’s not there yet, but with the projects we’re booking today I’m very confident it will do what it said. In my comments we’re very clear that business is executing to the plan, we approve for it this year, and so I’m pretty happy with it.

Yes, understood and thank you for that. Can you make a comment about the contribution that you got from your St. George location during the quarter, I remember that was a little bit of a drag last quarter, maybe talk about how that’s operating and make a little bit of a comparison of the contributions quarter-over-quarter?

Scott this is Jim, I don’t have a specific, I think, last quarter it was a drag in the beginning of the quarter, it was a positive contributor by the end of the quarter and fairly neutral for a full quarter perspective.

Yes.

And this quarter, it’s executing well and it’s profitable. We want to be a little careful about talking about profitability by plant, because we schedule production based on the scheduling, where the projects are, and so we kind of move activity from one plant to another. But in the end of the day, we’ve got a little bit of a positive contribution from our Utah facility compared to a year-ago when it was closed and we were incurring depreciation costs associated with that.

Yes, understood. And one more if I may Jim, since I got you here, there was a comment about $5 million slipped out of the quarter. Should we expect about the same amount each quarter through the rest of the year here? Or do you expect that to maybe tapper a little bit?

Well, the way I’ll answer it is that I tried to give some direction, both in terms of kind of the quarterly outlook by segment as well as the full-year growth by segment, and that takes into account, what we’ve already seen and what we expect relative to that kind of shipment. The short answer to your question is, our overall guidance for the year does reflect quarter-by-quarter movement some of which moved out to the latter part of this fiscal year and some into next fiscal year.

Okay. And with regard to having to delay glass shipments on some projects, do you get paid for storing that stuff? Obviously, you can’t send it out there onsite until it’s ready to be installed. So that provides a little bit of an issue for you with regard to having to move that stuff around, or at least keep it around for a while. Is that something you get paid for?

Yes. Our terms and conditions certainly allow us to be compensated if we have to store glass.

Okay. Terrific. Thank you.

Thank you, Scott.

Thank you. And I’m showing no additional questions, I would like to turn the conference back over to Mr. Joe Puishys, for any closing remarks.

Okay, Ben, thank you. And everybody thanks for taking the time to hear our story. Great to see the enthusiasm in the questions. Hopefully, our explanations today help you put some meat on the bones of a one-page earnings release. And hopefully, you feel better about the explanations I’d like to repeat, we’re now halfway through the year at knocking on a door of 9%, operating margin. You heard, Jim mention our full year expectation is 9.5%, which is up from our prior quarterly reports. Obviously, you can do the math, the second half of the year will exceed 10%. We are in areas we’ve never performed this well before at Apogee. So we’re exceeding historical peaks and we are, as I mentioned, far from historical peak end market conditions. Feel there’s a lot of steam left in the end markets, and we’ll continue to take advantage of that. I look forward to some more results in the third quarter and we’ll look forward to talking to you all then. And in the mean time, have a great day everybody. Thank you.

Ladies and gentlemen, thank you for your participation in today’s conference. This does conclude the program, and you may all disconnect. Have a great rest of your day.