Earnings Call Transcript - APOG Q3 2020

Operator, Operator

Thank you for joining us for the Apogee Enterprises Fiscal 2020 Third Quarter Earnings Conference Call. I will now turn it over to our speaker today, Jeff Huebschen. Please proceed. Thank you, Shannon. Good morning, and welcome to Apogee Enterprises Fiscal 2020 Third 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, which is also available on our website. Also, I'd like to remind everyone that our call will contain forward-looking statements reflecting management's expectations, which are based on currently available information. Actual results may differ materially. More information about factors that could affect Apogee's business and financial results can be found in our SEC filings. And with that, I'll turn the call over to you, Joe.

Joseph Puishys, CEO

Thank you, Jeff. And thank you, everyone, for joining us this morning. By now, you have seen our release. Clearly, the results this quarter did not meet our expectations or yours. The shortfall in the quarter was primarily driven by operational difficulties and sales shortfalls in a couple of our Framing Systems business units. Jim and I will provide more detail on that throughout this morning. We are taking actions to address these issues, and I'll provide more information on that in a moment, as will Jim. Beyond these issues, our other businesses and our other business units are well positioned and have had a number of positives in the quarter. First, our Architectural Services segment continues to execute at high levels. They are performing better than expected with strong project execution and operating margins approaching 10%. Just as importantly, the segment continues to win in the marketplace, adding over $100 million to its already record backlog during the quarter, a 20% increase from the last quarter and a 40% increase from a year ago. Based on our current pipeline, we expect to see even more backlog growth in the fourth quarter in our Services segment. With this backlog, our Services business is positioned for solid top and bottom line growth for at least the next 2 years. Large-Scale Optical also continues to be a high performing business, delivering on planned growth in the quarter along with its usual impressive operating margins of 28%. In Architectural Glass, we continue to see improvement in operational performance in our factories, absorbing the startup cost of our new factory. We successfully launched that new facility in Texas, executing our strategy to grow in the small project segment of the market, which is the largest part of the Architectural Glass market. We shipped our first orders out of this factory in the quarter, and we have seen a favorable response from the market to our offering. This is a critically important milestone in our strategy to diversify the Glass segment particularly as we see continued pricing pressure in our traditional core market from foreign competitors leveraging their weaker currencies to compete in the United States. Additionally, our financial position remains strong, and we had very solid operating and free cash flow during the quarter, which we used to pay down debt. I'd also like to note that we continue to progress as expected toward completing the last of the legacy EFCO projects. We did see some net favorable recovery during the quarter, as we continue to pursue resolution of the remaining costs and claims related to this project. Finally, our view of the end markets remains fairly positive. I continue to view the market as bumping along the top. Our strong backlog growth and pipeline in Architectural Services points to continued healthy construction activity across the United States for the foreseeable future. In our other Architectural businesses, it's more of a mix story, with strong bidding and quoting activity in some segments of this market and higher levels of customer-driven schedule delays in others. But overall, our view of the market has not changed, and we still see conditions that support long-term growth for our businesses. After a few months of concerns about the U.S. economy, things have turned more upbeat over the last 90 days. Turning back to Framing Systems. Let me provide some details on the quarter and the actions we're taking. The quarter was impacted by lower sales volumes and operational difficulties in a few of our Framing businesses. Jim will provide more detail on the specific drivers, but they include revenue shortfalls and manufacturing issues in just a subset of our Architectural Framing Systems businesses. The results are disappointing, and I and our entire leadership team are focused on resolving the underlying issues. Last quarter, we announced that we had created a new overall segment leader for Framing Systems, charged with driving integration, synergies and improved financial performance. The 6 operating businesses in this segment will be led as 1 by one leader who took the reins in Q3. Given this quarter's challenges, we are accelerating these efforts moving quickly, but deliberately, to drive positive change. First, we have made significant changes to the individual business unit leadership of several of these businesses, particularly in the underperforming businesses. In addition to these leadership actions, the team is developing an integration and performance improvement plan considering every available lever. The plan is focused on 3 pillars, which are outlined on Page 5 in our slide deck: First, reducing our cost structure through procurement savings, overhead cost reductions, and minimizing controllable costs; second, commercial excellence, which is focused on integrated product management, sales, marketing and pricing strategies, along with applying the lessons learned from our Architectural Services segment to improve project selection; and third, operational and supply chain integration, optimizing our manufacturing capacity and footprint and building on our lean enterprise program to drive productivity in key value streams across these businesses in this segment. Last quarter, I also discussed our enterprise-wide procurement savings program. I'd like to provide an update on our progress in this initiative. Earlier this year, we retained AlixPartners, a leading global advisory firm to help us identify cost savings opportunities across our company. Over the past quarter, we have made significant progress. The scope of the project includes all categories of spend: direct material; indirect material and services; and freight, accounting for roughly half of Apogee's total cost structure. We analyzed 32 categories of spend, which have been divided into 3 ways. We are currently working through the 3 ways implementing various strategies to capture the identified savings opportunities, and this will come over the next several quarters. As part of the initiative, we are moving toward a centralized procurement model that better leverages our scale and will drive synergies across our supply chain. To lead this effort, I have added a new role of Chief Procurement Officer, who will report to me and will join our team in January. Taken together, we expect the Framing Systems' performance improvements and the procurement savings project to generate $30 million to $40 million of annual savings. We'll begin to see some benefit immediately with the savings building as the projects mature over the next year. We plan to provide further details on the expected impact in fiscal '21 when we provide guidance in our year-end call. Though we are reducing our outlook for the year, I remain confident in our long-term direction and see numerous opportunities to drive improvements going forward. We are taking concrete actions to address near-term performance issues. As I outlined earlier, much of our business remains healthy with solid execution, strong market positions, robust backlogs and supportive end markets. Finally, initiatives like our procurement savings project and our small projects Architectural Glass entry provide more reasons for optimism. With that, I'll pass it over to Jim, who will provide more details on the quarter and our outlook. And before I take questions, I'll return with a few additional comments.

James Porter, CFO

Thanks, Joe, and good morning. I'll begin with our consolidated results, which you can see on Page 7 of our earnings presentation. Total revenue came in at $338 million, down from last year's third quarter, primarily due to lower sales in Architectural Framing Systems and in Architectural Glass. Operating margin of 6.4% was down from 8.8% in last year's third quarter, reflecting leverage on the lower sales volumes and the operational challenges in Framing Systems that Joe mentioned. Adjusted EBITDA came in at $33.7 million compared to $42.7 million in last year's third quarter. Net interest and other expense decreased to $1.8 million, with lower effective interest rates resulting from the debt refinancing actions we announced last quarter. The tax rate of 23.2% was down slightly from last year's level, and our diluted share count dropped to 26.8 million from 28.2 million shares last year due to our share repurchases over the past year. Putting this all together, earnings were $0.57 per diluted share compared to $0.78 in the prior year quarter. Now I'll turn to segment results, which are on Slide 8 in the presentation. Framing Systems revenue was $166 million compared to $181 million in last year's third quarter. This decrease was largely due to customer-driven delays and operational difficulties in a couple of businesses. Operating income was $6.3 million with an operating margin of 3.8% compared to adjusted operating margin of 7.5% in last year's third quarter. Operating margins in the quarter were impacted by leverage on the lower volumes, higher-than-expected manufacturing costs and some operational challenges in a couple of businesses. Specifically, we had higher-than-expected manufacturing costs on some projects in one of our curtainwall businesses, requiring a revised total estimated project cost with resulting project-to-date margin write-downs. These projects remain profitable, but the margins had to be written down. This true-up had an approximately 300 basis point negative impact for the segment in the quarter. Only partly offsetting this, we did see nice operational progress at EFCO and continued growth and solid margins in our legacy short lead time Framing businesses. Architectural Glass revenue declined 9% to $89 million, primarily due to lower volumes resulting from increased competition from overseas competitors as well as some customer-driven delays. Operating margin decreased to 4.6% compared to 5.9% last year. Q3 Glass segment margins were negatively impacted by about 160 basis points from startup costs related to the new manufacturing facility for the small projects growth initiative. Year-to-date, we have incurred $2.9 million of our estimated $4 million to $5 million of startup costs for this initiative. The impact has been partially offset by improved operational performance in our factories. Architectural Services continued to have great success with several new project wins during the quarter, increasing the segment's backlog to a record $607 million. As anticipated, Architectural Services revenue decreased to $69 million from $73 million in last year's third quarter due to the timing of project schedules. Operating income was $6.5 million with an operating margin of 9.5%, down from 11.9% in last year's very strong third quarter, with reduced operating leverage on the lower revenue base and a bit less favorable project maturity. Finally, Large-Scale Optical grew its revenue by 4% to $24 million with good product mix in the quarter. Segment operating margin was 27.7% compared to 28.4% in last year's third quarter. I'll cover cash flow and the balance sheet on Slide 10. We had positive cash flow with $36 million of cash from operations in the quarter. Fiscal year-to-date, we have now generated $54 million of cash from operations. We are still below last year's level, primarily due to increased working capital related to completion of the legacy EFCO projects, which has reduced year-to-date cash flow by approximately $28 million. Overall, we expect continued positive cash flow in the fourth quarter. Year-to-date capital expenditures are $41 million, up from $34 million at this point last year, primarily driven by our investments in the new Architectural Glass fabrication facility and facility improvements at EFCO that were completed earlier in the fiscal year. We now expect full year CapEx of approximately $55 million, which we've tightened from our previous guidance of $60 million to $65 million. During the quarter, we used our excess free cash flow to pay down $21.5 million of debt, reducing our total debt to $251 million from $273 million at the end of the second quarter. As we move through the balance of the fiscal year, we'll continue to deploy free cash flow to reduce debt along with opportunistic share buybacks. I'll cover our outlook on Page 11. We are adjusting our full year outlook due to the lower-than-expected revenue and margins in the third quarter and softer expected results in the fourth quarter. In the fourth quarter, we expect operational improvements in Framing Systems, offset by lower revenues from increased customer-driven schedule delays, lower orders, and some seasonality. We now expect full year revenue will be flat to down 1% compared to fiscal 2019, down from our previous guidance of 1% to 3% growth. We now expect full year earnings per diluted share between $2.15 and $2.30 compared to our previous guidance of $3 to $3.20. And we continue to forecast a full year effective tax rate of approximately 24.5%. We've also adjusted our segment guidance, which is on Slide 12. Our outlook for our Framing Systems has declined from the last guidance. Revenue is now projected to be down mid-single digits compared to our prior guidance for growth. This decline is from the revenue shortfalls in the third quarter, and in addition, looking to the fourth quarter, we experienced higher-than-normal customer schedule delays, moving revenue out of fiscal '20 and lower orders with some share loss in our U.S. window and wall business. Operating margin is projected to be between 5% and 5.5%, down from the prior guidance, due to the third quarter manufacturing cost issues and the lower expected volumes in the fourth quarter. As you heard from Joe, we are taking these shortfalls seriously, and we're taking strong actions to turn these great businesses around. In Architectural Glass, our outlook has changed slightly. We now expect full year revenue growth in the mid to upper single digits, down slightly from our previous guidance due to higher customer schedule delays and the continuing impact of increased international competition for large projects. We do continue to see good success in the midsized project market. We are lowering our full year margin outlook for Architectural Glass to approximately 6% compared to our previous forecast of approximately 7%, primarily due to reduced leverage on the lower volume. We continue to expect approximately $4 million to $5 million of full year startup costs for the new Architectural Glass growth initiative, which reduces full year Architectural Glass margins by 100 to 150 basis points, which is included in the guidance provided. We are expecting limited revenue in the fourth quarter from this facility as we ramp it for effective short lead-time deliveries, and we expect this initiative will continue to ramp up in fiscal 2021, making positive contributions to both revenue and operating income. Our outlook for Architectural Services revenue is unchanged, forecasting a decline for the full year of approximately 10%. We now see full year operating margins of 7% to 8%, above our previous forecast of approximately 7% due to strong project execution. The project wins and backlog bode well for the Services segment as we look ahead to fiscal '21 and fiscal '22. Finally, our full year revenue outlook for Large-Scale Optical is down just slightly, expecting low to mid-single digit growth. We continue to expect operating margins of approximately 25%. With that, I'll turn the call back over to Joe.

Joseph Puishys, CEO

All right. Thanks, Jim. Let me close by reiterating that we are not satisfied, and I am not satisfied with this quarter's results. We know where the issues are and we know what they are. We are moving quickly, taking actions that will drive improved results. Performance in much of our business remains strong. We have a solid financial position with attractive leverage. We have a substantial number of nonrecurring costs in fiscal '20. Additionally, our end markets remain supportive with indicators like the ABI, new construction starts and employment gains, all trending upward in the recent months. We like our businesses positioned for fiscal '21 and beyond as we work to resolve the near-term issues. Finally, before we open up for questions, I'd like to acknowledge Jim's decision to retire from Apogee as his role as CFO. Jim has been a key part of Apogee's leadership team for over 22 years. I want to thank him for his dedication and many contributions over those years and primarily for being my friend. We are beginning a search for his successor, and Jim has agreed to stay on in his current role through the process to facilitate a smooth transition. Jim, we thank you. I thank you for everything you've done for us and for me. With that, I'd like to ask Shannon to open up the call for your questions.

Operator, Operator

Our first question comes from Chris Moore with CJS.

Christopher Moore, Analyst

Yes, maybe we could start with Framing. Yes, so the customer-driven delays, is there any common denominator in terms of what was driving that?

James Porter, CFO

Yes, Chris, this is Jim. There are various factors, but if we were to identify the primary ones, the main issue is the scheduling on job sites. As we progress further into the value chain of construction projects, the availability of labor has caused delays, leading to extended project timelines. Additionally, we've noticed that general contractors have been overly optimistic about their ability to commence projects, which has also pushed back the start dates. These are the two primary reasons; while such delays are typical in the industry, we've observed them occurring more frequently recently.

Christopher Moore, Analyst

Sure. Regarding the challenges with Framing that may have been somewhat self-inflicted, could you provide more details? It seems that some projects may have been mispriced, along with operational issues that you did not foresee, perhaps similar to what was mentioned a quarter ago. Can you elaborate on that?

Joseph Puishys, CEO

Yes, Chris, this is Joe. In one of our curtainwall manufacturing businesses, excluding our installation services, we are operating at full capacity in the factory. We encountered some complex projects during this time. In the third quarter, it became clear to us that we would not meet our margin expectations. The challenges were quite significant, and we had to make adjustments to the revenue figures for those projects, while the remainder is aligned with the new margin. There are two main projects involved; they are not losing money but are significantly below the originally anticipated margin rate. The team has gained valuable insights from this experience. We are currently bidding on similar projects, and we expect to secure new business that has been priced much higher, reflecting what we've learned. These two projects in our curtainwall manufacturing sector have taught us valuable lessons, and we will adjust our pricing strategy accordingly in the future.

James Porter, CFO

And I'll just add, Chris, specifically, there are a couple of projects that have a higher degree of manufacturing complexity that just became more of a challenge than was originally estimated. As Joe mentioned, when that started happening in a kind of at-capacity manufacturing environment in that facility, it became difficult to overcome and offset the beginning manufacturing costs for those projects.

Joseph Puishys, CEO

Chris, one of the organizational changes we implemented was the appointment of a new leader for our two curtainwall manufacturing businesses. This individual has a background in the Services segment, where he managed large and complex projects for companies like our Harmon Services segment. He has been reporting directly to me for the past 1.5 years, overseeing our global operations, and has now transitioned into the leadership role for our two curtainwall businesses. I anticipate that he will significantly help us tackle the issues we discussed.

Christopher Moore, Analyst

And those two primary projects, I mean, how big are they? Do they extend well into fiscal '21, or do you have any sense there?

James Porter, CFO

Yes. These projects will be largely complete by early, probably the first quarter of fiscal '21. A smaller portion of it will carry into the second quarter. But a majority of it will carry into fiscal '21. So as we talked about, we had to do a true-up, which really was a charge in the third quarter. In the fourth quarter now, we'll see margin on these projects, but just at lower margin than was originally forecasted for these and kind of wrapping up early next fiscal year.

Operator, Operator

Our next question comes from Eric Stine with Craig-Hallum.

Eric Stine, Analyst

So just coming back to these two projects quickly. So I mean, just maybe talk about your confidence level that the write-downs you've taken on them that, that fully captures kind of where they should be going forward. And then I know you just laid out that you expect maybe a little bit into fiscal '21. But I mean, confidence that on new business that maybe fits this complexity profile that those will be priced appropriately with the appropriate margins going forward.

Joseph Puishys, CEO

Yes. Eric, I'm confident that we obviously went to DEFCON 5 on these projects and put our top people at Apogee involved in this. We believe we have taken the margin write-downs to the level we can perform for the completion of the projects. As I mentioned, they are not lost projects but at substantially less margin than they should have. As I mentioned, as we're going forward, we're pricing substantially higher on similar business going forward. We can make the product. It is complex, but it is certainly in our wheelhouse. So I am confident that both the charges are behind us and that we can finish these projects as is with the current margin assumptions and that we're falling into backlog will be at normal margins.

Eric Stine, Analyst

Okay, got it. And then maybe on the cost reductions of $30 million to $40 million. I might have missed it, but did you call out a time frame, whether it's later in fiscal '21, when you think you'll be at that run rate in full?

Joseph Puishys, CEO

Yes. Well, certainly, by the end of fiscal '21. We're not providing guidance for fiscal '21 now. I can say that there'll be substantial favorable impact in fiscal '21 over fiscal '20. Some of the savings begin relatively immediately. And through the first and second quarter, we'll get a decent-sized piece of that. But we're just not going to provide the full impact to '21, but it will be fairly substantial.

Eric Stine, Analyst

Okay. No, that's great. And then lastly, I mean, it actually sounds like nice that EFCO doesn't sound like that's really part of the missteps in Framing. So I guess, confirming that with you, but also, I know that the last problem project, you've kind of talked about a few quarters of residual work. So just any thoughts about, are there any risks associated with wrapping that project up and kind of putting that behind you?

Joseph Puishys, CEO

EFCO has been performing well this year and meeting my expectations. The building is mostly enclosed, meaning the windows and doors are nearly all installed. There are sections left to complete, such as the elevator shafts that need to be removed before we finish the work. This is standard practice in construction. For the most part, EFCO is almost finished with that project. They have a few more units to complete. Overall, it's been a challenging project for us and has had a significant financial impact. While it's not entirely without risks, we have solid cost estimates for completion in our forecast. As I mentioned on the call, we've seen a modest net gain on some recovery efforts. We will continue to pursue claims against us and those we have. I believe our forecast is well-balanced. A project is never completely risk-free until it is finished, which will not happen until the first half of calendar 2020. However, we are nearing completion, and things have been proceeding according to plan.

James Porter, CFO

And then, Eric, just your opening comment and question about kind of the core EFCO business, as Joe said, they are performing to our expectations. We are seeing the improved productivity that we've been looking at in that business. Operationally, we're seeing improvements, and so our focus now is the emphasis from the operations side of the business to really drive the top line opportunities in that business.

Operator, Operator

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

Brent Thielman, Analyst

Joe, you've been in this process of trying to integrate all these subsidiaries within the Framing business. I guess, I wanted to take a step back and sort of ask the results here, to some degree, are a consequence of trying to do that? And does it give you any pause in terms of what you're trying to do there or sort of change the game plan at all for that?

Joseph Puishys, CEO

Well, listen, Brent, first off, the performance for this segment was not acceptable. It is not a consequence of our effort to integrate and consolidate this. We are just getting started in that effort. We're being careful, and our goal is not to alienate customers or mess up the business; the performance issues. We believe the leadership changes we've made and that we're adding by creating the segment leader role is going to help us avoid these kinds of misses going forward. It's a big company. These 6 businesses are in the same operating segment. We have the opportunity to do a better job leveraging our manufacturing footprint, leveraging our product offering so that we don't launch new products in 1 business if we can leverage the same baseline products in another. All these things are in front of us, not behind us. There was no causal factor on this quarter's performance because of our efforts to create this 1 operating segment.

Brent Thielman, Analyst

Okay. And sort of parsing out the businesses that have been performed to your expectations, is the rest of the business kind of in that target low double digits margin range that you wanted to be at?

Joseph Puishys, CEO

Yes.

Brent Thielman, Analyst

Okay. And then, I guess, on Glass and the commentary about the foreign competition, I know they've been kind of in and out of the market. But I guess, what markets do you primarily see in that? And I think in the past, it principally been on the Eastern seaboard, but I thought kind of the Northeast was picking up for you. So maybe any comments there.

Joseph Puishys, CEO

Well, the Northeast and the Midwest, it's primarily the large projects, the large towers. I've been pleased that the leader of that business and I and Jim, we spend a lot of time going over what kind of margins we're prepared to take. Of course, we will look at lower margin projects if we believe it's strategically a good move. But we are also prepared to walk away and not chase low-margin work that the company did in the Glass business back 10 or 11 years ago, and that's why Apogee was losing money back in fiscal '11. We're not going to do that. It is a challenge. On the large monumental towers, lead time is not an issue, and product can come from virtually anywhere in the world and meet the lead times. We have good competitors around the world. With the dollar to euro exchange rate at $1.11, it has opened up the door for foreign competition. The markets are pretty poor in our end markets in Europe, and this has become a good landing spot for that competition. We accept competition; that's the world we all live in, hence, our strategy to move into the mid-market and most recently into the small project segment. The small project segment is actually larger square footage than the combination of the large and the mid-market. So it's a strategic imperative for us. We feel this competition in the large projects is here for the foreseeable future until we start to see recovery in their markets and hopefully, a more balanced exchange rate, and maybe I can return the favor someday.

Brent Thielman, Analyst

Congratulations on getting the small project facility up and running. Do you have any initial insights on what to expect from that business in fiscal 2021? I understand it is ramping up, and when do you anticipate it will reach optimal capacity and achieve the margins you expect?

Joseph Puishys, CEO

Yes. I can't provide guidance for fiscal '21. What I can tell you is the orders and the inbound increase in the orders bode well for us achieving or beating our investment thesis for that investment that we made. They're producing excellent product. It's highly automated, it's amazing quality, and we'll provide more on that, but it will be a contributor in fiscal '21. We won't have the $5 million start-up costs; it'll have revenue in operating income in fiscal '21. So it will provide some upside and help us balance the risk we note in the large projects.

James Porter, CFO

We have talked about that operation having a potential capacity of a range of $30 million to $50 million of annual revenue. It's a big range, but a lot of it depends upon mix and those types of things and would expect it to take a couple of years to ramp up to those levels.

Joseph Puishys, CEO

The customer feedback we've received, Brent, on our initial shipments has been phenomenally positive. We're pleased with the performance.

Operator, Operator

Our next question comes from Julio Romero with Sidoti.

Julio Romero, Analyst

First off, Jim, congratulations on the retirement and all of your success at Apogee.

James Porter, CFO

Thank you, Julio.

Julio Romero, Analyst

I guess, on the overall guidance, did I hear you narrow your guidance range for the consolidated operating margin? I mean, you gave us plenty on the segment guidance, but just I'm sure if I missed anything on the consolidated margin there.

James Porter, CFO

No. I mean, we didn't call that out.

Julio Romero, Analyst

Okay, fair enough. I guess, maybe on the Glass segment, you talked about the large-scale projects and that impact, but you also mentioned the customer-driven delays. Can you just elaborate on that at all? And if those are expected to persist into the next fiscal year?

Joseph Puishys, CEO

This is Joe, Julio. I'll discuss Glass, and Jim will address the project delays or repeat what he mentioned. The project delays occurred within our Framing Systems segment. In Glass, we haven't highlighted that issue here. Our Glass business has performed well, with margins covering the startup costs in Q3, and more startup costs expected in Q4 as we finalize this program and enter the small projects. We are pleased with the performance. Volumes decreased slightly due to some share loss at the upper end, but the impact was not significant. We will continue to tackle that challenge in fiscal '21 while we see some revenue and margin improvements with the smaller and mid-sized project work. The project delay concern was related to a few of our curtainwall projects in Framing Systems and the mix of those projects.

Julio Romero, Analyst

I understand. I believe I heard you mention the Glass business. So, staying on that topic, could you elaborate on the new facility in Texas? I assume it will enable you to supply more glass to EFCO and possibly other areas of your business. Can you discuss how this aligns with your plans for Framing integration opportunities next year?

Joseph Puishys, CEO

Yes, you are correct that this business can supply glass to our internal subsidiaries, and this will contribute to the projected revenue of $30 million to $50 million that Jim discussed, which we anticipate will come from that factory. We have strong partnerships within our supply chain for this business and are effectively supporting them with the new volume we're introducing. This will be integral to our growth moving forward. As I mentioned, we have several new leaders in various Framing Systems divisions, many of whom are coming from Apogee and other sectors. I'm increasingly seeing a blend of leaders from different business segments, which I believe enhances the collaborative use of our capabilities across Apogee. I am excited about the growing cooperation between business units across the segments.

Operator, Operator

Our next question comes from Jon Braatz with Kansas City Capital.

Jonathan Braatz, Analyst

Joe, the strategy for the Architectural Framing business has been that it is a simpler operation, which should offer better protection when the market downturn occurs. However, this segment is currently facing the most challenges. Has anything changed in this business, or is it actually becoming more complex and vulnerable to disruptions than initially anticipated? Is there a significant shift in that market segment that could be contributing to the present difficulties?

Joseph Puishys, CEO

That's a very fair question and challenge, Jon. The answer is no. The business is profiled as we have always had it. We do certainly have a couple of businesses in that segment that are focused on larger projects, which involve a bit of complexity and are prone to schedule issues on the project site. We maintain a nice balance of very small project focus; our storefront and entrance business is reliable and steady, not shifting significantly from one quarter to the next. They've been performing consistently, and then we have large curtainwall projects, which were a concern this quarter. We have good experience with large curtainwall projects, much of which comes from our Service segment. Our new leader for our two curtainwall businesses and Framing Systems has significant experience from our Installation Services segment, and I believe we can reduce some of these surprises through more consistent manufacturing performance in those two businesses. We have a good mix. We don’t operate at full capacity every quarter. This was a challenging quarter for two of the larger businesses that we couldn't balance out with strong performance from the other four, but the mix is beneficial for us in the long term. I believe we needed to implement some changes within our leadership team.

James Porter, CFO

The majority of the revenue in the Framing Systems segment comes from smaller projects, where we continue to see growth and good margin performance, and this will be our focus for growth in that segment moving forward.

Jonathan Braatz, Analyst

Jim or Joe, as you look ahead, do you think the mix might change given the current difficulties? Or do you prefer the current ratio as it stands?

Joseph Puishys, CEO

I don't think the mix will change substantially. We will do a better job of having our growth focus tied to what we are better at. I mentioned a subtle point in my commentary, and it's no surprise that our Services segment has performed so well in the last few years because they embarked on a journey 5 or 6 years ago on understanding project selection and understanding complexity, understanding through a history of forensics on where we performed well and where we didn't on large projects that I mentioned in this call that we are going to leverage the learnings from that business to do a better job of project selection inside of our Framing Systems segment. Our strategy is a growth strategy, focused on better project selection, so we start with a better platform for success than we have shown in the last quarter.

Brent Thielman, Analyst

Okay. Jim, the $30 million to $40 million in cost savings over the next year or so, will you retain that? Or will you reinvest some of those savings, and maybe the net savings won't be as much as $30 million to $40 million?

James Porter, CFO

I mean, that will be evaluated as we develop our plans for next year. Our intention, at this point, at least for fiscal '21, is to hang on to a majority of that.

Joseph Puishys, CEO

To add to that, we will obviously look at short return investments, and to the degree we can drive further cost out of the business. If that takes some investment, we will apply some of the savings to that opportunity.

William Dezellem, Analyst

I actually wanted to follow up on that, the cost savings question. Would you characterize or breakout, if you would, that $30 million to $40 million in terms of where you are anticipating the savings coming from, number one? And then secondarily, what component of it are you just rock-solid on? And then how much potential upside is there to that $30 million to $40 million number?

Joseph Puishys, CEO

I'll provide some insight. While we're not giving guidance for fiscal '21, I can share that a significant portion of the anticipated $30 million to $40 million savings is tied to our procurement initiative. It hasn't been easy, but we've made considerable progress over the past three months with our global partner. We've identified a large part of the savings and will start implementing them immediately. I'm confident about the procurement savings part of that $30 million to $40 million. There’s still more work to be done regarding the Framing Systems synergies, but we're optimistic about the potential there. We have a low starting point since Framing Systems previously operated at much higher margins. Achieving those margins again is a realistic goal. I'm confident in the $30 million to $40 million estimate, which is why it was included in our guidance. A significant part of that will come from procurement, which is easier to identify. Additional savings will require substantial effort within Framing Systems, with a significant impact expected in fiscal '21. That's about all I can share on today's call.

William Dezellem, Analyst

I'm going to see if maybe you'll go just a little bit further, even though I heard what you just said. What aspect beyond $30 million to $40 million is there in terms of the potential? But frankly, today, you are simply less clear on and, therefore, aren't able to discuss quantitatively. Is there a meaningful component that would fall into that category? Or has this been pretty well vetted and so you don't have a lot of, if I may call it, murky future opportunity?

Joseph Puishys, CEO

The range that we put in this discussion today is not murky. It's fairly well identified. There is obviously a goal to drive much higher cost savings beyond that through continued hard work on product line management, continued procurement savings. This effort with AlixPartners is the beginning, not a one-shot deal. I mentioned I'm hiring a Chief Procurement Officer to make sure we deliver on these savings and then drive Phase 2 and Phase 3 going forward, meaning, it's just the beginning for procurement. I'm not going to tip my playbook to our competitors regarding the commercial opportunities that I expect my Framing Systems leader and business unit leaders to drive. Those are not quantified in that $30 million to $40 million. So yes, I expect to have long-term gains from operating that segment as 1 operating unit or 1 operating segment with different brands and our discrete factories that we have today.

Operator, Operator

Thank you. And I'm showing no further questions at this time. I'd like to turn the call back over to Joe Puishys for closing remarks.

Joseph Puishys, CEO

Thank you, Shannon. I will conclude where I began, which is that I understand our disappointment. I am strongly committed to turning this around, and I believe it will happen quickly. As I mentioned, we faced significant advantages in fiscal '21, including nonrecurring and project costs, the removal of unexpected performance issues, and a notable increase in backlog at Apogee, largely due to our Services segment, as well as promising future orders for Framing and our new Glass project. I believe fiscal '21 will mark a return to excellence for us, and you have my dedication to make that happen. I appreciate your attention today. I would also like to extend my congratulations and gratitude to Jim for his dedicated service to our company, and I wish everyone a happy and safe holiday season. Thank you very much.

Operator, Operator

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.