APOGEE ENTERPRISES, INC.(APOG)Q3 2026 法說會逐字稿

Good day, and thank you for standing by. Welcome to Apogee Enterprises Third Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question and answer session. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. As a reminder, this conference is being recorded for replay purposes. I'll now turn the conference over to Jeremy Stephan, Vice President, Investor Relations and Communications to begin. Jeremy, please go ahead.

Thank you. Good morning, and welcome to Apogee Enterprises Fiscal 2026 Third Quarter Earnings Call. On the call today are Don Nolan, Apogee's Chief Executive Officer and Mark Ogdahl, our interim Chief Financial Officer. During this call, the team will reference certain non-GAAP financial measures. Definitions of these measures and a reconciliation to the nearest GAAP measures provided in the earnings release and slide deck are available in the Investor Relations section of our website. As a reminder, today's call will contain forward-looking statements. These reflect management's expectations based on currently available information. Actual results may differ materially from those expressed today. More information about factors that could affect Apogee's business and financial results can be found in our press release and in the company's SEC filings. With that, I'll turn the call over to Don. Thanks, Jeremy, and good morning, everyone. We're glad you could join us for our third quarter earnings call.

Before I begin my prepared remarks, I want to acknowledge an announcement made earlier today. Matt Osberg has informed us of his decision to leave the company to pursue an opportunity elsewhere. I want to thank Matt for his many contributions over the past three years and wish him continued success in the future. Stepping in as the interim CFO is our Chief Accounting Officer, Mark Ogdahl, who has been at Apogee for over twenty-five years. I look forward to partnering with him as we begin our search for the company's next CFO. Next, I'd like to start by saying it's a real privilege to have the opportunity to lead the company through this period of transition. While I've served on Apogee's board since 2013, the past few months as CEO have given me a deeper perspective, strengthening my confidence in Apogee's future. I'd like to share a few observations. First, our customers consistently tell us how much they value the quality and reliability of our products and services. That feedback is energizing and underscores a core principle of mine: Companies that delight their customers win in the market. Apogee has built that reputation over seventy-six years and continues to raise the bar. Second, across Apogee, we have exceptional talent. Individuals who are passionate, resilient, and relentlessly focused on exceeding the expectations of customers. Their ability to deliver tremendous value, especially in this dynamic environment, reinforces the strength of this company and gives me tremendous confidence in our future. And third, the Apogee management system continues to drive value across our manufacturing footprint. The returns on our AMS investments are fueling margin benefits and reinforcing the operational excellence that helps define our organization. I'd also like to highlight the UW Solutions acquisition which celebrated its one-year anniversary this quarter. We are pleased with the initial results, and the team is on track to deliver our fiscal 2026 expectations of $100 million in net sales and approximately 20% in adjusted EBITDA margin. UW Solutions expands our market and geographical reach, adding substrate capabilities and coating technology, and provides a platform for potential growth in fiscal 2027 and beyond. Now turning to our results for the quarter. I am pleased with the team’s ability to deliver in a dynamic environment. This performance reflects not only disciplined execution but also the strength of our culture and the dedication of our people. It reinforces my confidence in the strategies put in place and our ability to adapt and win in dynamic markets. Although macroeconomic factors remain challenging, Apogee is well positioned because of three key strengths. Operational excellence through AMS, driving continued productivity improvement across our manufacturing footprint; our proven cost-out execution with Fortify phase one and phase two; and a strong balance sheet and healthy cash generation, which gives us flexibility for future M&A. These fundamentals, combined with the talent of our team, enable us to navigate near-term challenges and capitalize on long-term opportunities. In the near term, our priorities remain clear and unchanged. First, become the economic leader in our target markets with differentiated product and service offerings and competitive cost structures. Second, manage our portfolio by pursuing accretive M&A opportunities aligned with our strategic and financial objectives. And third, strengthen our core by driving more efficient operations, greater scalability, and enabling sustained profitable growth. I'm confident in our strategy and excited about what's ahead. Together, we have the opportunity to create significant value for all stakeholders. With that, I'll turn it over to Mark.

Thanks, Don, and good morning, everyone. First, I'll begin with the review of the results of the third quarter, and then follow with commentary on our outlook for the remainder of fiscal 2026 and some early insights into fiscal 2027. Beginning with our consolidated results, net sales increased 2.1% to $348.6 million, primarily driven by $18.4 million of inorganic sales from the acquisition of UW Solutions as well as favorable product mix. This was partially offset by lower volume primarily in metals. Adjusted EBITDA margin decreased slightly to 13.2%. The year-over-year change was primarily driven by lower volume and price and higher aluminum and health insurance costs. These were partially offset by lower incentive compensation expense and benefits from the cost savings related to Fortify phase two. Adjusted diluted EPS was $1.02, in line with our expectations and down year-over-year primarily driven by higher amortization and interest expense as a result of the UW Solutions acquisition. Turning to our segment results, metals net sales declined primarily due to lower volume, partially offset by favorable price and product mix. Adjusted EBITDA margin improved to 13.5%, primarily driven by increased productivity, including cost savings from Fortify phase two, lower incentive compensation expense, and favorable price and product mix. Our services segment delivered its seventh consecutive quarter of year-over-year net sales growth, primarily due to increased volume. Adjusted EBITDA margin increased to 9.7%, mostly driven by lower incentive compensation expense, partially offset by unfavorable project mix. Additionally, backlog for services ended the quarter at $775 million, down slightly from Q2 but up over 4% compared to Q3 of last year. Glass net sales increased slightly to approximately $71 million, primarily driven by increased volume and favorable mix, partially offset by lower price driven by end-market demand softness. Adjusted EBITDA margin moderated from last year primarily due to lower price and higher material costs, partially offset by higher volume, favorable product mix, and lower incentive compensation expense. Performance surfaces net sales increased, driven by the inorganic sales contribution from the acquisition of UW Solutions. Inorganic growth primarily came from price. Adjusted EBITDA margin decreased primarily driven by the dilutive impact of lower adjusted EBITDA margin from UW Solutions and unfavorable productivity, partially offset by favorable product mix and price. Turning to cash flow and the balance sheet. For the third quarter, net cash provided by operating activities was $29.3 million, down slightly from $31 million in the third quarter of the prior year. On a year-to-date basis, cash from operating activities was $66.6 million compared to $95.1 million a year ago due to lower operating cash flow in the first quarter. Our balance sheet remains strong with a consolidated leverage ratio of 1.4 times. We have no near-term debt maturities and significant capital available for future deployment. Turning now to our outlook for the remainder of fiscal 2026. We are updating our estimates for both net sales and adjusted diluted EPS. We now expect net sales to be approximately $1.39 billion and adjusted diluted EPS in the range of $3.40 to $3.50. This outlook includes an updated estimate of the EPS impact from tariffs of approximately $0.30. Our updated outlook assumes an adjusted effective tax rate of approximately 27% and capital expenditures between $25 million and $30 million. The current macroeconomic backdrop remains challenging; in both our metals and glass segments, competitive market dynamics continue to put significant pressure on pricing and volume. Additionally, in our metal segment, average aluminum prices in the third quarter rose approximately 13% compared to the second quarter and are up over 50% compared to the third quarter of last year. These factors are driving volume pressure and margin compression, and we anticipate this dynamic will continue to impact us through the fourth quarter and to some extent, into fiscal 2027. Additionally, as we look ahead to fiscal 2027, we expect cost headwinds from the normalization of incentive compensation expense and higher health insurance costs. In order to offset a portion of the anticipated impact of these headwinds, we have expanded the scope of Project Fortify Phase two to include further restructuring actions primarily in metals and corporate. Based on the expected benefits of the expanded scope of Fortify phase two, we now expect to incur a total of approximately $28 to $29 million in pretax charges and deliver an estimated annual pretax cost savings of approximately $25 to $26 million, with approximately $10 million of that benefit to be realized in fiscal 2027. In addition, we expect the majority of the tariff impact of fiscal 2026 not to repeat and to be a benefit to fiscal 2027. Although we are in the initial stages of our planning for fiscal 2027, we are taking proactive measures, such as the expansion of Fortify phase two to manage near-term headwinds as well as position us to be more agile and better equipped to capitalize on growth opportunities as market conditions stabilize. Finally, I want to recognize and thank our employees for their resilience and dedication. Their commitment is critical to our success. By executing with rigor today, we are laying the groundwork for long-term value creation opportunities for our shareholders.

With that, I'll open the call to questions. Operator, please go ahead.

Thank you. As a reminder, to ask a question at this time, you will need to press 11 on your telephone and wait for your name to be announced. Please stand by while we compile the Q and A roster. First question coming from the line of Brent Thielman with D. A. Davidson. Your line is now open.

Hey. Thanks. Good morning. Don, a lot has changed here since the last earnings call. If you could start off and talk about what the board is looking for in terms of new leadership on a go forward basis. Is there any different view on the strategic direction of the company going forward versus what has been vocalized as the strategy before, particularly regarding scaling the Performance Services business?

Hi, Brent. Thanks for that question. No. There is no change in strategy. We remain focused on the existing strategies, the strategies that quite frankly were working before my tenure. On becoming the economic leader in our target market, continuing to manage the portfolio, and pursuing accretive M&A opportunities in faster-growing markets. The UW Solutions acquisition being the best example. And strengthening our core by driving more efficient operations, greater scalability, and enabling sustained profitable growth. So, no, there's no change whatsoever.

Okay. And sorry, Don. In terms of what you're looking for in new leadership as you're in the search process here, could you elaborate?

Yeah. So look, we started our process, and clearly, we're looking for someone who has deep growth and operational excellence experience, M&A integration, and the things that are called out in our strategy.

Alright. And then I mean, in terms of the updated outlook, it looks to me like the big impact there is just continued inflation and aluminum that we continue to see post-quarter. Assume it's predominantly impacting the metals segment?

Yes, Brent, if I could. That is the case.

It looks like you're embedding a more severe impact to margins in metals in the fourth quarter relative to what you saw in the third quarter. Is that the right way to think about this?

Yeah, Brent. Good observations. Both in metals and in glass, market dynamics continue to evolve. So, on metals, the primary issue there is the aluminum prices continue to increase. In our prepared comments, we noted that between Q2 and Q3, aluminum prices went up by 13%. And even here in December, we're seeing continued increases in that price. So the margin pressures continue to build.

And then, you know, maybe a little bit in glass as well.

We have about a sixty-day window on what we can see for orders. At Q2, we thought we would maintain that level, but we're seeing slight declines there. So we're again seeing a little bit of an impact, both on volume and price going into the fourth quarter. I would tell you, though, that we remain focused on managing our margin dollars. So as best as we can, we're controlling costs and implementing measures we can to control those costs, like the Fortify phase two expansion.

And I guess notwithstanding some of these short-term pressures that you are seeing in the market, are the long-term kind of EBITDA margin targets that you laid out before still appropriate to think about? Again, I know there's going to be some nuances in the near term for some of the things you called out.

That's exactly right, Brent.

Okay. Thank you. I'll pass it on.

Thank you.

And our next question in the queue is coming from the line of Jon Braatz with KCCA. Your line is now open.

Hello?

Hi, Jon. Oh, I'm sorry. I missed my queue.

Don, I just want to go back to the strategic direction of the company and how much emphasis you might place on M&A activity because, let's face it, in the past, it hasn't turned out to be very positive for Apogee. It seems to me the focus should be almost exclusively on running the business as profitably as possible, returning cash flow to shareholders in terms of dividends and share repurchases. So I want to get a better sense from you on where you see M&A going forward.

Look, our pipeline for M&A is robust. It's very active right now. We have spent a great deal of time and energy building all the processes and systems in the company to continue driving M&A. UW Solutions was a great acquisition for us. Twelve months in, we have achieved or beat all of our objectives. So, you know, it's a business that's growing robustly. Our Performance Services business segment was able to successfully integrate UW Solutions, almost doubling the size of the business and delivering organic growth at the same time. So we've demonstrated that we can execute, select a great acquisition that works for our strategy, and we have the discipline to execute on the integration. We continue to work our pipeline aggressively.

Okay. Another question. In the fourth quarter of last year, when Project Fortify was announced, you mentioned $26 million in costs that would be incurred and savings of $13 to $15 million. In this quarter, you said costs of $28 million to $29 million, which is a little bit higher, but savings of $25 to $26 million. What's the difference between the fourth quarter savings and what you said here in the first quarter? Am I missing something?

Nope, Jon. I'll take that. Yes, the ranges that you provided were accurate. The increases in costs are primarily headcount based, and holding our cost structure tight, we did incur some footprint-related matters in the fourth quarter here, which was the primary cost in the court in the fourth quarter. But, you know, again, we're focusing on things that will drive cost savings going forward.

So, the cost savings from $13 to $15 million to $25 to $26 million, that's correct with that number?

Yep. That's what we're showing.

Okay. Alright. Thank you.

Thank you. Our next question is coming from the line of Gowshihan Sriharan with Singing Research. Your line is now open.

Good morning. Can you hear me?

Yes. Loud and clear.

Thank you. Thank you for taking my question. My first question is on the metals and glass. I know you guys have mentioned some pricing discipline with keeping the plants efficiently utilized. How are you thinking about the bid approval process threshold and hurdle margins changing over the next six months? Have you walked away from any large projects or packages that might leave kind of under absorption risk in early fiscal 2027? Are you willing to consider flexibility around the pricing discipline?

I'll start off, and then turn it over to Mark. But look, glass is a highly competitive market. The glass team has been working hard to maximize EBITDA dollar contribution while protecting their premium margins. They faced significant challenges on volume and price. But look, the business is in a much stronger position than during the last downturn. Even with the market challenges we face today, glass is still operating in the teens EBITDA margin versus mid-single digits in the last downturn. So yes, we're going to continue to focus on maximizing EBITDA dollar contribution as the market shifts.

I don't have anything to add. I think Don covered what I thought was important, which is we implemented some really solid pricing strategies as we were initiating our current strategy, and we intend to continue that process. Of course, volume matters. We need to look at every project and opportunity that comes across. Additionally, as pointed out, with Project Fortify phase one and phase two, we are actively managing our cost structure to mitigate any short-term headwinds while ensuring we preserve our margins and manage the top line appropriately.

Gotcha. Are you seeing any noticeable pricing differences between your strategic repeat customers as opposed to your more transactional work? Has that gap kind of widened or narrowed since we spoke in Q2?

No, I don't think so.

Got it. The other area I might mention is, look, the UWS Solutions. One of the reasons why we thought this was such an attractive acquisition is because it allowed us to enter a part of the flooring market that serves warehouses and manufacturing facilities.

This is a growth area and has demonstrated some nice organic growth for us.

I'll make this my last question. I know you've highlighted the lower incentive compensation as a tailwind to margins across several segments this quarter. I think you've alluded that there will be some kind of normalization in the intensive compensation. But how should we think about sustainability from a talent standpoint? Are you structurally resetting some of that incentive programs, or is this just paying below at a tough year? As you look at the labor market in your key regions, are you comfortable with the overall compensation structure, ensuring that it remains competitive enough to execute Project Fortify and your growth plans?

We believe our structure is fine. We just entered a more difficult year, and we are not meeting our targets. So our compensation will be less this year, but we expect that to normalize into the future.

Thank you. That's all I have.

Thank you. Our next question is coming from the line of Julio Romero with Sidoti. Your line is now open.

Thanks. Hey. Good morning. Don, could you help us think about how you view the company's growth trajectory and opportunity set? How does the next leg of growth in your view for the company translate to any change in ROIC hurdles or metrics?

Well, you know, first of all, the strategy that we're focused on hasn't changed. We remain focused on becoming the economic leader in the target markets we serve, managing our portfolio, and strengthening the core. No change, Julio, in how we think about where we're going to grow and how. The addition of UW Solutions certainly opened up new markets and products that will enable us to grow faster. As part of our managing portfolio strategy, we continue to look for new opportunities in those lines—looking for acquisitions that will enable faster growth and at higher margins. We're going to discuss this in more detail on our next call when we talk about fiscal year 2027.

Okay. Understood. Can you dig into a bit into the priorities that are more near-term in nature? Do you have any quick wins or low-hanging fruit that you are looking to achieve early on?

Delivering our results will be critical. We're focused on delivering the year, right now. I mean, that's front and center.

I would just add, yes, Project Fortify phase two is probably the most important. But I would suggest that, you know, we are ramping up AMS again as we think about how we are trying to drive the cost structure down; our best tool to do that is through the Apogee management system. So that's going to be our tool to get there.

To Frank, Julio, one of my observations in my first sixty days has been that the operational excellence of productivity improvements that we've been able to deliver through AMS are truly extraordinary, especially in the glass business. We're seeing strength across the board: safety, quality, on-time delivery—you name it. And by the way, that was the birthplace of AMS. So they're leading the way, and it shows us what we could do with the rest of the company. It'll be a key focus for us. Last thing is, I've mentioned a couple of times, but accretive M&A is right front and center too. We have a very robust pipeline and we are active.

Got it. Going back to my first question a little more, and it ties into your comment about the robust M&A pipeline. Do you see any viewpoint differences regarding your perspective versus the last management team in terms of IRR hurdles or rate of return hurdles when looking at M&A and moving forward?

No. I don't think there is any difference in the financial analysis, but I would say we aim to move faster. We move with discipline, of course, but also faster.

Got it. That's helpful. I appreciate it. Lastly, you gave some preliminary commentary on your fiscal 2027. You mentioned you don't expect the tariff impact to reoccur in fiscal 2027. Any other high-level thoughts on the possibility of revenue or profit growth in '27?

I would reiterate, we're currently in the process of doing our AOPs. We highlighted what I view as the key headwinds and tailwinds: the tailwinds being Project Fortify phase two and the tariffs not repeating. The headwinds we've discussed several times include the normalization of incentive compensation and aluminum prices, which we will continue to monitor as we move through the fourth quarter and plan for our AOP.

That's helpful. Best of luck, guys. Thanks.

Thank you.

And I am showing no further questions in the queue at this time. I will now turn the call back over to Don for any closing comments.

Well, thank you for joining us today. We look forward to sharing the fourth quarter and full year results in April along with our fiscal 2027 outlook. I hope you have a great week.

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