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spk00: Hello and welcome to Apple G Enterprises in Q2 2024 earnings conference call. At this time, all participants on a listen only mode. After the speaker's presentation, there will be a question and answer session. To ask the question during this session, you will need to press star one one on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star one one again. I will now like to hand the conference over to Jeff Hepson. So you may begin.
spk10: Thank you, Tawanda. Good morning and welcome to Apple G Enterprises fiscal 2024 second quarter earnings call. With me today are Ty Silberhorn, Apple G's chief executive officer and Matt Osberg, chief financial officer. I'd like to remind everyone that there are slides to accompany today's remarks. These are available in the investor relations section of Apple G's website. During this call, we will reference certain non-GAAP financial measures. Definitions of these measures and reconciliation to the nearest GAAP measures are provided in the earnings release and slide deck we issued this morning. I'd also like to remind everyone that our call will contain forward looking statements. These reflect management's expectations based on currently available information. Actual results may differ materially. More information about factors that could affect Apple G's business and financial results can be found in today's press release and in our SEC filings. And with that, I'll turn the call over to you Ty.
spk07: Thank you, Jeff. Good morning everyone and thanks for joining us. Apple G has delivered another terrific quarter as we continue to advance our strategy. Let me touch on some highlights from the quarter and connect those to how our strategy continues to drive sustainable improvements in our business. Then I'll turn it over to Matt for more details on the quarter and our outlook. Let's start with the highlights which are on page four in our presentation. Overall, this was another strong quarter that continued the positive momentum we've established the past two years. We are especially pleased to report an operating margin that exceeded our 10% target for the first time since we established our financial goals in late 2021. This margin expansion drove adjusted earnings per share to a new quarterly record. I'm proud of our team for the work they've done to achieve these milestones. Just as importantly, we've demonstrated that we can meaningfully grow profit dollars and cash flow even in an environment without meaningful volume growth. Once again, architectural glass led the way continuing their revenue and profit growth trend. As a reminder, when we began our strategic transformation two years ago, the glass segment had operating margins in the low single digits. We've now achieved eight consecutive quarters of sequential margin improvement. I'd like to recognize the entire glass team for this tremendous success. Our improved results are being driven by our three pillar strategy which is highlighted on page five in our presentation. We've made great progress toward becoming an economic leader. We've better defined our target markets. We're focused on differentiated products and services. We've built more competitive cost structures and we've made great strides to improve operational execution. In our second pillar, actively managing the portfolio, we've taken steps to shift our portfolio to higher margin offerings which drive improved ROIC performance. We're making investments to scale and grow our top performing businesses. We've implemented focused improvement plans to strengthen underperformers and we are increasing the mix of differentiated offerings across our portfolio. Finally, we are strengthening our core capabilities. The foundation of this is deploying the Apogee management system which is our approach to lean and continuous improvement. We are also continuing our shift from a decentralized operating model to one with center-led functional expertise that better supports the needs of our business. And we are improving our approach to talent management and talent development at all levels of the organization. As we move forward, we see significant opportunities to continue to build on this success. When we announced our new financial goals in 2021, we had operating margins in the low to mid single digits and we were not earning our cost of capital. As we began to execute our strategy, improving margins and ROIC was the primary focus, especially in glass and framing systems which were underperforming their potential. In several cases, we made the strategic decision to move away from lower margin sales where we did not have differentiated offerings. Now that we have substantially improved our margins and are earning above our cost of capital, it is appropriate to shift more focus to driving profitable revenue growth. We are making strategic investments that will enable organic growth. We are leveraging our improved execution and service levels to gain market share. We are working to further diversify our project mix in the higher growth sectors. And we continue to explore potential acquisition opportunities that support our strategy, accelerate our growth and our diversification. These efforts will create opportunities across the enterprise to drive above market growth in the years ahead. We will do this while sustaining the things that have made us successful these past two years. Staying focused on driving productivity and execution, carefully managing our cost structure and further strengthening our results driven culture. With that, let me turn it over to Matt. Thanks
spk09: Ty and good morning everyone. First I'll begin with an overview of our second quarter results and then turn to our updated outlook for the full fiscal year. As we look at our second quarter results, despite revenue declining 5%, it was another strong earnings quarter. Adjusted diluted EPS through 28% to a record level of $1.36. We also expanded operating margin by 290 basis points to 11.5%. Consolidated revenue was $354 million for the quarter compared to $372 million last year, primarily reflecting lower volumes in services and framing. This was partially offset by strong growth in glass, which was up 22%. The growth in glass was driven by improved volume, pricing and mix, reflecting our continued strategic shift towards higher value premium products. In our services segment, revenue recognition is mainly a function of the stage projects are in and how much work has been completed. Compared to the second quarter of last year, in the current year, we had a higher mix of products that are early in their life cycle, which drove lower levels of revenue being recognized in the current quarter. The revenue declined in framing was primarily driven by lower volumes, reflecting elevated volumes in the prior year as we worked to reduce lead times to drive a reduction in backlog. This was partially offset by a more favorable product mix. Consolidated operating income increased 26% and operating margin expanded 290 basis points to 11.5%, primarily driven by strong sales and margin improvement in glass. Segment operating income for glass nearly tripled to $17.4 million up from $6.5 million last year. The glass segment operating margin improved to .5% over a 10 percentage point increase compared to last year and reflects favorable operating leverage and benefits from pricing and mix. Framing grew segment operating income 3% and expanded segment operating margin by 140 basis points to 13.3%, driven primarily by improved mix and cost efficiencies, partially offset by the impact of lower volume. Both services and large scale optical segment operating margins were down, primarily due to the impact of lower volume. However, services improved margin sequentially from the first quarter and we expect services margin to continue to improve in the second half of the year. Corporate expenses of $6.1 million were in line with prior year, however, were less than the first quarter of fiscal 24, primarily due to lower insurance related costs. While our corporate costs can have variability from quarter to quarter, we expect the run rate for the third and fourth quarters to trend more closely with the levels experienced in the first quarter. This quarter, we recognized a $4.7 million pre-tax benefit from a new markets tax credit, which was recorded in other income. The new markets tax credit is a federal program that encourages investments in local communities. The credit we realized this quarter was related to investments we made seven years ago. We have two similar tax credits pending, which we expect to recognize in fiscal year 26. Our tax rate in the quarter was 22.9%, below our long-term rate assumption of .5% due to the favorable impact of discrete tax items. Adjusted EPS grew 28% to $1.36, primarily driven by higher operating income. EPS was also benefited by a lower diluted share count, which reflects our share repurchase activity over the past two quarters. Looking at backlog trends for the quarter on a sequential basis, backlog for framing was $197 million compared to $221 million in the first quarter. The reduction was driven primarily by a decline in our longer cycle business, reflecting delays in award activity and continued strategic shift towards projects that allowed for more attractive margins. Services finished the quarter with $674 million in backlog, compared to $709 million last quarter, primarily reflecting delays in award activity. We had another strong quarter of cashflow as we generated $41.3 million of cash from operations, an improvement of $13.5 million over last year. This brings -to-date operating cash flows to $62.6 million, an improvement of $65.2 million compared to the first half of last year. This was primarily driven by improved working capital as the first half of last year had unfavorable working capital impacts related to sales growth and inflation. We had capital expenditures of $7.6 million in the second quarter, primarily relating to investments to expand capacity in our higher margin businesses and enhanced productivity through automation. We also returned nearly $12 million in cash to shareholders through dividends and share repurchases, and we paid down $25 million in debt in the quarter. This debt reduction further strengthened our balance sheet with our net leverage ratio coming down to 0.7 times trailing 12-month adjusted EBITDA. Turning to our updated fiscal year outlook, we are increasing our full year adjusted diluted EPS outlook to a range of $4.35 to $4.65, primarily reflecting the strong results in the second quarter. This updated outlook implies full year adjusted EPS growth of 9% to 17% compared to last year's adjusted diluted EPS of $3.98. We also continue to expect flat to slightly declining net sales for the fiscal year. As a reminder, fiscal 24 is a 53-week year with an extra week of operations in the fourth quarter. For the full year, the extra week is expected to add approximately two percentage points of growth to revenue. Our outlook range contemplates the latest market forecast, which point to a potential slowdown in non-residential construction in the second half of our fiscal year. Any impact of this would more quickly affect the shorter cycle businesses within framing and glass. As in past years, we expect the fourth quarter will be the lowest revenue and margin quarter for framing due to the seasonality of the winter construction season. We expect framing margins for the full year will be near the top of its 9% to 12% target range. For glass, although we expect revenue growth and margin levels to moderate in the second half of the year, we expect the full fiscal year operating margin to be toward the higher end of the 10 to 15% target that we articulated last quarter. We expect services revenue and operating margin to increase in the second half of the year compared to the first half, primarily due to the progression of work on active projects. Although services margin should improve as we move through the year, we expect that it will likely fall short of the 7 to 9% target range for the fiscal year. We expect sales and margins in large scale optical to improve sequentially in the second half of the year as customer inventory levels rebalance. As I mentioned earlier, we expect corporate costs for the third and fourth quarters to trend more closely with the level of expense we incurred in the first quarter. We continue to expect an average tax rate of approximately .5% and full year capital expenditures of 50 to $60 million. We also continue to expect both operating and free cash flow growth for the full year. We are very pleased with the earnings results we have delivered in the first half of the fiscal year. With adjusted diluted EPS growth of 17% and operating margin expansion of 140 basis points despite declining sales. We are focused on delivering the back half of the year and continuing to drive our strategic initiatives to set us up for fiscal 25 and beyond. As we look ahead to fiscal 25, we are monitoring macro economic trends and industry data to assess potential impacts on our business. As we begin our planning process for next fiscal year, we will stay focused on driving long-term shareholder value and we'll take a balanced approach for any short to midterm market changes while maintaining investment and momentum behind our most critical strategic initiatives. We are approaching fiscal 25 with a growth mindset, a focus on driving further productivity gains and a balanced approach to cost control and strategic investments. While we have been able to expand operating margins significantly over the past two years, we believe that we have further positive margin building blocks yet to realize. We believe that fiscal 25 margins will be helped by further productivity and AMS initiatives and improved project pipeline and services, continued emphasis on improving mix and framing and potentially using our strong balance sheet for attractive M&A. Additionally, although we expect glass segment margin rates to moderate in fiscal 25, we are focused on maximizing margin dollars while delivering margin rates within our target range of 10 to 15%. As a reminder, fiscal 25 will revert to a normal 52-week year, which will be a headwind for -over-year comparisons. In closing, we are pleased with our second quarter and first half results as well as our continued progress to advance our strategic objectives and drive improved profitability. This improved profitability will better position us to outperform throughout the market cycle. Additionally, our strong cash flow and balance sheet position us for further value creating capital deployment, investing in our business and returning cash to shareholders. With that, I'll turn it back over to Ty for some concluding remarks.
spk07: Thanks, Matt. To wrap up, I wanna recognize our team once again for their tremendous efforts in advancing our strategy. Through their work, we have exceeded our 10% margin target less than two years since we set this goal. And we're not done, as we'll continue building on these achievements. While we see some signs of softening in the broader non-residential market, we are seeing positives that play to our strengths and strategic focus. Premium Class A office space is still seeing solid demand and many research firms predict this area will perform better than the broader office segment. We're seeing a higher rate of mixed-use buildings that blend office, retail and residential. Institutional and transportation projects remain strong and there's a renewed focus on sustainability and green buildings. Our current backlog reflects many of these trends, while future acquisitions could accelerate our growth and diversification. We also expect to drive additional productivity gains through the Apogee management system and further improve operational execution. We're proud of the progress to date and we continue to see significant opportunities to deliver long-term above market growth across our business. With that, we are ready to take your questions.
spk00: Thank you. Ladies and gentlemen, as a reminder to ask the question, please press star one one on your telephone and then wait to hear your name announced. To withdraw your question, please press star one one again. Please stand by while we compile the Q&A roster. Our first question comes from the line of Chris Moore with CJS Securities. Your line is open.
spk06: Good morning, guys. Congrats on a very nice quarter. Good morning. Maybe we'll just start on the framing operating margin. Obviously, Q2, very strong, 13.3%. You talked about efficiencies from lean and mixed. Can you maybe just talk a little bit more about kind of what mixed means within the framing? Are we talking about types of projects, quick turn versus longer? Is it types of buildings? Anything else in terms of kind of that mixed component?
spk07: Sure, it's a great question, Chris. There's a couple things going on in framing. One, our shorter cycle business, we see stronger margins and as that business has recovered on service and lead time levels, last year in their second quarter, they were catching up and really cleaning up and you saw that the backlog dropping, which was a positive thing for the short cycle portion of that business because it had built up through some extended lead times due to some supply chain issues. So that was one issue that they were working through from a year over year comp perspective. Revenues last year were a bit increased or up a bit for them because of that recovery. But as we were going through that, that short cycle business, with that service differentiation, we are able to get some stronger margins than other parts of the business. So we've continued to invest and the team is driving their focus to accelerate and grow more of that business. The project related business has always had some lower margins compared to the short cycle business and there's two things going on there. One, the team's being much more selective about where it think it can differentiate and capture value both for the customer and us, which would translate into some better margins. And then we've encouraged the team that if we can't get margins that help us achieve and sustain our long-term profit goals, then it's probably business we don't want on some of that project related business. So you're seeing that start to show up in the revenue mix and you're also seeing that as a driver in some of the drop in the backlog for that business as well.
spk05: Got it, that is very helpful. Let
spk06: me just switch gears. So aluminum pricing bounced around a bit lately, still well below March levels. Is there any kind of likely benefit or penalty from aluminum pricing, that timing that's built into the balance of 24?
spk09: Yeah, Chris, this is Matt. I wouldn't say there's any real material impact built into the back half.
spk06: Got it. And maybe just on cashflow, obviously very strong quarter, good six months. Cashflow has dropped, you jumped around a little bit at working capital as you talked about. At some point, is there a normalized relationship you would expect between free cashflow and say net income or is there any other metric that we should be thinking about when looking at kind of a normalized free cashflow?
spk09: Yeah, it's a great question, Chris. I mean, obviously we had some unique things that happened last fiscal year and we're realizing the benefits of it this fiscal year is that's becoming more normalized. I think as we look at our opportunities in working capital, there's still some opportunities for us to get better as we move forward. I think the big driver there will be how we look at our investments in CapEx in the future and how we can fund some of our organic initiatives through CapEx. So, obviously we have a little bit higher CapEx this year than we have in the past and as we start looking at fiscal 25, we'll figure out how that plays out for next year. But I think this year will be a little bit more returned to a normalized working capital whereas maybe last year was a bit more of an aberration for what was happening in the markets. And as we turn the page and start looking
spk08: at 25, we'll get more information on how that's gonna play out next year.
spk06: Got it. And you're still talking about 50 to 60 million in CapEx for this year?
spk09: Yeah, yep. It's a higher spend in the second half than the first half, but just some of the time in the investments that we're planning to make just end up being in
spk08: the second half.
spk06: Got it. I'll leave it there. Thanks so much, guys. Thank you. Thank you.
spk00: Please stand by for our next question. Our next question comes from the line of Julio Romero with the Dodie & Company. Your line is open.
spk01: Thanks. Hey, good morning. Just wanted to piggyback on the last question about cash usage and how you're thinking about, it sounded like based on the prepared remarks, you're really thinking about shifting some focus to growth investments. You talked about maybe a step up in CapEx and fiscal 25. Just maybe, how much of a step up in CapEx can we maybe expect in 25? And it sounds like you might be closer to maybe some inorganic growth opportunities. Would that be fair as well?
spk09: Hey, Julio, this is Matt. I'll jump in on this and then Ty maybe add. So from a CapEx perspective, I think what I reflected to Chris was fiscal 24 is a step up in CapEx from where we've been in fiscal 23. And so I think you can see that as we look to fiscal 25, we're gonna start looking at that and what that might mean. I think there are some good opportunities to invest in some organic growth initiatives, but we haven't gone through that planning process yet. But we wanna continue to invest as we've talked about as we look at 25, we wanna continue momentum and invest behind our best strategic initiatives. And so we don't wanna lose any of the momentum that we're building, but we don't have numbers yet to kind of project out what that would be in fiscal 25 yet. And then from an inorganic perspective, I think we're always being active in that space. We've got the balance sheet ready to do it. And we just continue to look for the best opportunity out there at an attractive price. Yeah,
spk07: I think that's a good summary. I'll just add, I mean, that this year, there's a large driver in a significant colder and building expansion within LSO that will put capacity in place that they can go into some of these adjacent markets that we wanted to enter. And we started to hint and talk about that in November of 2021. So that was a big driver for the step up year over year. I think we've commented, this isn't probably a normalized run rate, but to the same point, if we see a significant opportunity that requires a meaningful investment that we think has great returns and help drives organic growth, we certainly would look at that. And then as Matt said on M&A, we're active and we have been active. I think our investors would be happy to know that we're being very disciplined
spk04: in
spk07: that approach. We're being very thoughtful about strategic fit, how it helps diversification and how it's a creative to our long-term financial goals.
spk01: Really appreciate all the color and detail there. And then you guys talked about seeing, or towards the end of your prepared remarks, you mentioned mixed use buildings. Just talk about, are you seeing more orders for mixed use buildings and talk about the secular growth prospects of that mixed use category?
spk07: Yeah, we've seen that increase. And I would say there's been a few projects that have been won in the last year where projects may have been installed for a couple of quarters in terms of reward. And some rework went back into those to take it from 100% office to flip it and have maybe 30, 40, 50% office and then bring in some residential and retail space as part of that, which got that project to go, gave it the green light from that perspective. So I would say, yeah, we've seen an uptick in mixed use. We look at that now as part of our backlog analysis. So we're looking at it in both bid and quote activity. And then certainly we're tracking and looking at that now as a separate category in our award activity in our backlog as well. So I think that maybe helps. Two things from an office standpoint. We still continue to see premium office space projects coming forward and being awarded and green lighted. And then projects that maybe on the drawing board were going to be 100% or nearly 100% office, kind of reshaping those to a mixed use building has allowed those projects to get off the drawing board and get the green light to be executed. So both of those for us are positives and kind of fit into our sweet spot, both in terms of what we're trying to do with our glass business on the shift to premium. And then it fits very well within our services business for what they target for project types.
spk01: Really helpful. And then if I could just sneak one last one in here is just on the glass segment. You're performing very well operationally there. Just how much more runway do you have left with mixed improvements in the glass segment for the rest of the year?
spk07: Well, I would start as Matt said in his comments. I would look at this quarter as everything went great. Like everything that could go well in terms of mix, in terms of price, in terms of productivity, in terms of execution. So I would say this quarter is kind of a snapshot of when demand's at the right level and we've got the highest premium mix that we can get into our bookings and revenues, this is what a really great quarter would look like. As he talked to, I wouldn't put this now as a new benchmark that we don't expect that that to continue at that level. And certainly from a margin perspective, we reguided to that 10 to 15% in good demand markets and then seeing them on an annualized basis perform at the high end of that range is where we wanna be. We think that allows us to maximize the profit dollars and so we don't wanna tip over here and all of a sudden get fixated on margin percentage because that business is generating very nice return on invested capital now. It's generating great income dollar growth and we wanna stay focused on making sure we're at the right price points, right margin level, right mix that we can grow those profit dollars.
spk01: Great, thanks for taking the questions, Gus.
spk05: Thank you, Leo.
spk00: Thank you. Please stand by for our next question. Our next question comes from the line of John Bratz with KCCA, your line is open. Good morning, everyone.
spk11: Morning, John. Ty,
spk12: a question, you mentioned that as you look forward, you're gonna be spending some money on organic opportunities and I guess my question is, are we talking about maybe new products, new geographies, specifically what are some of the things you might be thinking in terms of organic growth opportunities?
spk07: I would look at it, if you look at our non-resi construction business, which is the bulk of our business, I would first think about new geographies. So looking at how can we expand our reach into other parts of North America. So those are areas we've looked at in the past. We wanted to make sure that we're at the right margin level and understood where we could best differentiate what's in the portfolio today. In support of that as well, we are making some capacity investments as well as some productivity investments. Those productivity investments not only help us with growth, but it can help in terms of our service and lead time capabilities, which also is a way for us to differentiate. So we've made and are making some capital investments this year that kind of give us a combination that will help us on the productivity side, but they're also going to give us some stronger capabilities from a service level standpoint that we think helps us even take share in the markets that we're in. We're always introducing or working with customers from a new product perspective, but I would say right now as we look at those, we don't see things other than the coder investment we made in large scale optical. We don't see things that are going to take a major capital investment at this point to introduce a dramatically new product offering into the market space. As we look at diversification in the portfolio and you think about adding new products that really move us into other adjacencies within the segments we're already playing in, acquisitions is likely a way for us to step into that.
spk12: Sure, sure. When you speak about new geographies, organically speaking, we're not talking about a new footprint, but just expanding existing facilities and making those capital investments in current facilities as opposed to new green field plants.
spk07: It could be a combination of both, but I think you'd see us be thoughtful in how we do that. I like a real options approach, so if we think there's an untapped market that we're really missing an opportunity on, let's say on the West Coast, how would we step into that in an optional way that gives us some presence in our ability to serve the local market before we would make major investments in terms of manufacturing, say coding, extruding capabilities, et cetera. As we look at those geographies, I think we can reach some of those with some additional capacity in existing facilities. Freight logistics and our ability to have short lead times will limit just how much we can do there. So even in an incremental step of having a distribution center, warehouse, et cetera, there's small things we can do to make some minor investments to get a footprint in a market and then prove that out before we make some significant capital investments in equipment.
spk11: Okay, sounds great. Thank you very much. Thanks, John.
spk00: Thank you. I'm sure there are no questions in the queue. I would now like to turn the call back over to CEO, Ty Silver, for three marks.
spk07: All right, well thanks everyone for joining us today. Another great quarter for Apogee. We couldn't be more proud of our team and the accomplishments that we've delivered to date. And as we touched on, we still see a lot of opportunities for our business as we move ahead. We'll look forward to talking to everyone in the next quarter. Have a great day.
spk00: Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.
spk02: Thank you. Thank you. Thank you.
spk03: Thank you. Thank you. Regardless of age I Do Do Do Do Do Do Do Do Do
spk00: Do Do Do Do Hello and welcome to apple g enterprises in q2 2024 earnings conference call At this time all participants on a listen-only mode After the speaker's presentation there will be a question and answer session to ask the question during this session You will need to press star 1 1 on your telephone You will then hear an automated message advising your hand is raised To withdraw your question, please press star 1 1 again I will now like to hand the conference over to jeff heption so you may begin
spk10: Thank you tawanda. Good morning and welcome to apogee enterprises cisco 2024 second quarter earnings call With me today are ty silverhorn apogee's chief executive officer and matt osberg chief financial officer I'd like to remind everyone that there are slides to accompany today's remarks. These are available in the investor relations section of apogee's website During this call we will reference certain non-gap financial measures definitions of these measures and Reconciliation to the nearest gap measures are provided in the earnings release and slide deck we issued this morning I'd also like to remind everyone that our call will contain forward-looking statements These reflect management's expectations 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 today's press release And in our sec filings and with that i'll turn the call over to you ty Thank
spk07: you, jeff. Good morning everyone and thanks for joining us Apogee has delivered another terrific quarter as we continue to advance our strategy Let me touch on some highlights from the quarter and connect those to how our strategy continues to drive sustainable improvements in our business Then i'll turn it over to matt for more details on the quarter and our outlook Let's start with the highlights which are on page four in our presentation Overall This was another strong quarter that continued the positive momentum. We've established the past two years We are especially pleased to report an operating margin that exceeded Our 10 target for the first time since we established our financial goals in late 2021 This margin expansion drove adjusted earnings per share to a new quarterly record I'm proud of our team for the work. They've done to achieve these milestones Just as importantly We've demonstrated that we can meaningfully grow profit dollars and cash flow Even in an environment without meaningful volume growth Once again architectural glass led the way continuing their revenue and profit growth trend As a reminder when we began our strategic transformation two years ago The glass segment had operating margins in the low single digits We've now achieved eight consecutive quarters of sequential margin improvement I'd like to recognize the entire glass team for this tremendous success Our improved results are being driven by our three pillar strategy which is highlighted on page five in our presentation We've made great progress toward becoming an economic leader We better to find our target markets We're focused on differentiated products and services We've built more competitive cost structures And we've made great strides to improve operational execution In our second pillar actively managing the portfolio We've taken steps to shift our portfolio to higher margin offerings Which drive improved roic performance We're making investments to scale and grow our top performing businesses We've implemented focused improvement plans to strengthen underperformers And we are increasing the mix of differentiated offerings across our portfolio Finally, we are strengthening our core capabilities The foundation of this is deploying the apogee management system, which is our approach to lean and continuous improvement We are also continuing our shift from a decentralized operating model To one with center-led functional expertise that better supports the needs of our business And we are improving our approach to talent management and talent development at all levels of the organization As we move forward we see significant opportunities to continue to build on this success When we announced our new financial goals in 2021 We had operating margins in the low to mid single digits and we were not earning our cost of capital As we began to execute our strategy improving margins and roic Was the primary focus Especially in glass and framing systems which were underperforming their potential In several cases We made the strategic decision to move away from lower margin sales where we did not have differentiated offerings Now that we have substantially improved our margins and are earning above our cost of capital It is appropriate to shift more focus to driving profitable revenue growth We are making strategic investments that will enable organic growth We are leveraging our improved execution and service levels to gain market share We are working to further diversify our project mix in the higher growth sectors And we continue to explore potential acquisition opportunities that support our strategy accelerate our growth and our diversification These efforts will create opportunities across the enterprise to drive above market growth in the years ahead We will do this while sustaining the things that have made us successful these past two years Staying focused on driving productivity and execution Carefully managing our cost structure And further strengthening our results driven culture With that Let me turn it over to matt
spk09: Thanks ty and good morning everyone First i'll begin with an overview of our second quarter results and then turn to an to our updated outlook for the full fiscal year As we look at our second quarter results despite revenue declining five percent. It was another strong earnings quarter Adjusted diluted eps through 28 percent to a record level of one dollar and 36 cents We also expanded operating margin by 290 basis points to 11.5 percent Consolidated revenue was 354 million dollars for the quarter compared to 372 million dollars last year primarily reflecting lower volumes in services and framing This was partially offset by strong growth in glass which was up 22 The growth in glass was driven by improved volume pricing and mix Reflecting our continued strategic shift towards higher value premium products In our services segment revenue recognition is mainly a function of the stage projects are in and how much work has been completed Compared to the second quarter of last year In the current year We had a higher mix of products that are early in their life cycle which drove lower levels of revenue being recognized in the current quarter The revenue declined in framing was primarily driven by lower volumes Reflecting elevated volumes in the prior year as we worked to reduce lead times to drive a reduction in backlog This was partially offset by a more favorable product mix Consolidated operating income increased 26 percent and operating margin expanded 290 basis points to 11.5 percent Primarily driven by strong sales and margin improvement in glass segment operating income for glass nearly tripled to 17.5 million dollars up 17.4 million dollars up from 6.5 million dollars last year The glass segment operating margin improved to 18.5 percent over a 10 percentage point increase compared to last year and Reflects favorable operating leverage and benefits from pricing and mix Framing grew segment operating income 3% and expanded segment operating margin by 140 basis points to 13.3 percent driven primarily by improved mix and cost efficiencies Partially offset by the impact of lower volume Both services and large-scale optical segment operating margins were down primarily due to the impact of lower volume However services improved margin sequentially from the first quarter and we expect services margin to continue to improve in the second half of the year Corporate expenses of 6.1 million dollars were in line with prior year However, we're less than the first quarter of fiscal 24 primarily due to lower insurance related costs While our corporate costs can have variability from quarter to quarter We expect the run rate for the third and fourth quarters to trend more closely with the levels experienced in the first quarter This quarter we recognized a 4.7 million dollar pre-tax benefit from a new markets tax credit which was recorded in other income The new markets tax credit is a federal program that encourages investments in local communities The credit we realized this quarter was related to investments. We made seven years ago We have we have two similar tax credits pending which we expect to recognize in fiscal year 26 Our tax rate in the quarter was twenty two point nine percent below our long-term rate assumption of twenty four point five percent Due to the favorable impact of discrete tax items Adjusted EPS grew twenty eight percent to one dollar and thirty six cents primarily driven by higher operating income EPS was also benefited by a lower diluted share count which reflects our share repurchase activity over the past two quarters Looking at backlog trends for the quarter on a sequential basis backlog for framing was 197 million dollars compared to two hundred and twenty one million dollars in the first quarter The reduction was driven primarily by a decline in our longer cycle business Reflecting delays in award activity and continued strategic shift towards projects that allowed for more attractive margins Services finished the quarter with six hundred and seventy four million dollars in backlog compared to seven hundred nine million dollars last quarter primarily reflecting delays in award activity We had another strong quarter of cash flow as we generated forty one point three million dollars of cash from operations an improvement of thirteen point five million dollars over last year This brings -to-date operating cash flows to sixty two point six million dollars an Improvement of sixty five point two million dollars compared to the first half of last year This was primarily driven by improved working capital as the first half of last year had unfavorable working capital impacts related to sales growth and inflation We had capital expenditures of seven point six million dollars in the second quarter primarily relating to investments to expand capacity in our higher margin businesses and enhanced productivity through automation We also returned nearly twelve million dollars in cash to shareholders through dividends and share repurchases and we paid down Twenty five million dollars in debt and in the quarter This debt reduction further strengthens strengthened our balance sheet with our net leverage ratio coming down to zero point seven times trailing twelve month adjusted EBITDA Turning to our updated fiscal year outlook We are increasing our full year adjusted diluted EPS outlook to a range of four dollars and thirty five cents to four dollars and sixty five cents Primarily reflecting the strong results in the second quarter This updated outlook implies full year adjusted EPS growth of nine percent to seventeen percent Compared to last year's adjusted diluted EPS of three dollars and ninety eight cents We also continue to expect flat to slightly declining net sales for the fiscal year As a reminder fiscal 24 is a 53 week year with an extra week of operations in the fourth quarter For the full year the extra week is expected to add approximately two percentage points of growth to revenue Our outlook range contemplates the latest market forecast which point to a potential slowdown in Non-residential control construction in the second half of our fiscal year Any impact of this would more quickly affect the shorter cycle businesses within framing and glass as In past years we expect the fourth quarter will be the lowest revenue and margin quarter for framing Due to the seasonality of the winter construction season We expect framing margins for the full year will be near the top of its nine to twelve percent target range For glass although we expect revenue growth and margin levels to moderate in the second half of the year We expect the full fiscal year operating margin to be toward the higher end of the 10 to 15 percent target that we articulated last quarter We expect services revenue and operating margin to increase in the second half of the year compared to the first half primarily due to the progression of work on active projects Although services margins should improve as we move through the year We expect that it will likely fall short of the seven to nine percent target range for the fiscal year We expect sales and margins in large-scale optical to improve sequentially in the second half of the year as customer inventory levels rebalance as I mentioned earlier We expect corporate costs for the third and fourth quarters to trend more closely with the level of expense we incurred in the first quarter We continue to expect an average tax rate of approximately 24.5 percent and full year capital expenditures of 50 to 60 million dollars We also continue to expect both operating and free cash flow growth for the full year We are very pleased with the earnings results. We have delivered in the first half of the fiscal year with adjusted diluted EPS growth of 17 percent and operating margin expansion of 140 basis points despite declining sales we are focused on delivering the back half of the year and Continuing to drive our strategic initiatives to set us up for fiscal 25 and beyond as We look ahead to fiscal 25 We are monitoring macroeconomic trends and industry data to assess potential impacts on our business as We begin our planning process for next fiscal year We will stay focused on driving long-term shareholder value and will take a balanced approach for any short to midterm market changes While maintaining investment and momentum behind our most critical strategic initiatives we are approaching fiscal 25 with the growth mindset a focus on driving for further productivity gains and a balanced approach to cost control and strategic investments While we have been able to expand operating margins significantly over the past two years We believe that we have further positive margin building blocks yet to realize we believe that fiscal 25 margins will be helped by further productivity and ams initiatives an improved project pipeline and services continued emphasis on improving mix and framing and potentially using our strong balance sheet for attractive M&A Additionally, although we expect glass segment margin rates to moderate in fiscal 25 We are focused on maximizing margin dollars while delivering margin rates within our target range of 10 to 15 percent as A reminder fiscal 25 will revert to a normal 52 week year, which will be a headwind for -over-year comparisons In closing we are pleased with our second quarter and first half results as well as our continued progress to advance our strategic objectives and drive improved profitability This improved profitability will better position us to outperform throughout the market cycle Additionally our strong cash flow and balance sheet position us for further value creating capital deployment Investing in our business and returning cash to shareholders with that. I'll turn it back over to Ty for some concluding remarks
spk07: Thanks, Matt To wrap up I want to recognize our team once again for their tremendous efforts in advancing our strategy Through their work. We have exceeded our 10% margin target less than two years since we set this goal In we're not done as we'll continue building on these achievements While we see some signs of softening in the broader non-residential market We are seeing positives that play to our strengths and strategic focus Premium class a office space is still seeing solid demand and many research firms predict This area will perform better than the broader office segment We're seeing a higher rate of mixed-use buildings that blend office retail and residential Institutional and transportation projects remain strong and there's a renewed focus on sustainability and green buildings Our current backlog reflects many of these trends while future acquisitions could accelerate our growth and diversification We also expect to drive additional productivity gains through the apogee management system and further improve operational execution We're proud of the progress to date and we continue to see significant opportunities to deliver long-term Above-market growth across our business with that we are ready to take your questions
spk00: Thank you Ladies and gentlemen as a reminder to ask the question Please press star 1 1 on your telephone and then wait to hear your name announced to withdraw your question Please press star 1 1 again, please stand by while we compile the Q&A roster Our first question comes from the line of Chris Moore with CJS securities your line is open
spk06: Good morning guys. Congrats on a very nice quarter Good morning. Maybe we'll just start on the framing Operating margin obviously q2 very strong 13.3 percent. You talked about you know, efficiencies from lean and and mix Can you maybe just talk a little bit more about you know, kind of what mix? Means Within the framing are we talking about, you know types of projects, you know quick turn versus longer as the types of buildings Just anything else in terms of you know, kind of that mix component
spk07: Sure, it's a great question Chris. There's a couple things going on in framing one our shorter cycle business We see stronger margins and as that that business has recovered on service and lead time levels You know last year in their second quarter They were catching up and really cleaning up and you saw that the backlog dropping Which was a positive thing for the short cycle portion of that business because it had built up through some extended lead times due to Some supply chain issues. So that was one issue that they were working through from a -over-year Comp-perspective revenues last year were a bit increased or up a bit for them because of that recovery But as we were going through that that short cycle business with that service differentiation We are able to get some stronger margins than other parts of the business So we've continued to invest and the team is driving their focus to accelerate and grow more of that business the project related business has always had You know some lower margins compared to the short cycle business and there's two things going on there One the team's being much more selective about where it think it can differentiate and capture value both for the customer and us which would translate into some better margins and And then we've encouraged the team that if we can't get margins that help us Achieve and sustain our long-term profit goals, then it's probably business. We don't want on some of that project related business So you're seeing that start to show up in the revenue mix and you're also seeing that as a driver in some of the drop in backlog for that business as well
spk05: Got it is very helpful Let
spk06: me just switch here. So aluminum pricing bounced around, you know a bit lately still well below March levels Is there any you know kind of likely benefit or penalty from aluminum pricing that? Timing that's that's built into the balance of 24
spk09: Yeah, Chris, this is Matt I wouldn't say there's any real material impact built into the back half
spk06: Got it And maybe just on cash flow obviously very strong quarter good six months Cash flows dropped you jumped around a little bit at working capital as you talked about at some point Is there a normalized relationship you would expect between? Free cash flow and say net income or you know Is there any other metric that that we should be thinking about when when looking at kind of a normalized free cash flow?
spk09: Yeah, it's great question Chris I mean obviously we had some unique things that happened last fiscal year and we're you know Realizing the benefits of it this fiscal year is that becoming more norm normalized You know, I think as we we look at our opportunities and working capital There's there's still some opportunities for us to get better as we move forward I think the big driver there will be you know How we look at our investments in capex in the future and how we can fund some of our organic initiatives Through through capex So, you know, obviously we have a little bit higher capex this year than we have in the past and as we start looking at fiscal 25 we'll figure out you know how that plays out for next year, you know But I think this year will be a little bit more returned to a normalized working capital Maybe last year was a bit more of an aberration for what was happening in the markets And you know as we as we turn the page and start looking at
spk08: 25 We'll we'll get more information on and how that's gonna play out next year
spk06: Got it and you're still talking about 50 to 60 million in capex for this year
spk09: Yeah, yeah You know higher spend in the second half in the first half But just some of the time in the investments that we're planning to make just end up being in second
spk08: half
spk06: Got it. All right, I'll leave it there. Thanks so much guys. Thank you. Thank you
spk00: Thank you, please stand by for our next question Our next question comes from the line of Julio Romero with the dodean company your line is open
spk01: Thanks, hey good morning, um, just wanted to piggyback on the last question about You know cash usage and how you're thinking about it sounded like based on the prepared remarks You're you're really thinking about Shifting some focus to growth investments. You talked about you know, maybe a step up in capex and fiscal 25 just maybe you know how much of a step up in capex can we maybe expect in 25 and and and It sounds like you might be closer to maybe some more inorganic growth opportunities. Would that be fair as well?
spk09: Hey Julio, this is bad I'll jump in on this and then time maybe yeah, so from a capex perspective What I think what I reflected to Chris was the fiscal 24 is a step up in capex from where we've been in fiscal 23 And so I think you can see that as we look to fiscal 25, you know We're going to start looking at that and what that might mean I think there are some good opportunities to invest in some inorganic or some organic growth initiatives But you know, we haven't gone through that planning process yet But you know, we want to continue to invest as we've talked about as we look at 25 We want to you know continue momentum and invest behind our best strategic Initiatives and so we don't want to lose any of the momentum that we're building But we don't have you know numbers yet to kind of project out what that would be in fiscal 25 yet You know and then from an inorganic perspective, you know, I think we're always Being active in that space we've we've got the balance sheet ready to do it And you know, we just continue to look for the the best opportunity out there at an attractive price Yeah,
spk07: I think that's a good good summary who I'll just add I mean that this year, you know There's a large driver in a significant colder and building expansion within LSO That will put capacity in place that they can go into some of these adjacent markets that we wanted to enter and we started to Hint and talk about that, you know in November of 2021 So that was a big driver for the step up -over-year I think we've commented, you know, this isn't probably a normalized run rate But to the same point if we see a significant opportunity that requires You know a meaningful investment that we think has great returns and help drives organic growth. We certainly would look at that And then as Matt said on M&A we're active and we have been active. I think Our investors would be happy to know that we're being very disciplined In that approach we're being very thoughtful about strategic fit how it helps diversification And how it's a creative to our long-term financial goals
spk01: Really appreciate all the color in detail there and then you guys talked about Seeing or Towards the end of your prepared remarks you mentioned Mixed-use buildings to just talk about you know, are you seeing more orders for mixed-use? Buildings and talk about the secular growth prospects of that mixed-use category
spk07: Yeah, we've seen that increase and and I would say there's been a few projects that have been one in the last year Where Projects may they may have been stalled for a couple quarters in terms of reward and some rework went back into those to take from a hundred percent office To flip it and and have you know Maybe thirty forty fifty percent office and then bring in some residential and retail space as part of that which Got that project to go, you know gave it the green light from that perspective So I would say yeah, we've seen an uptick in mixed-use You know, we look at that now as part of our backlog analysis So we're looking at it in both bid and quote activity and then certainly we're we're tracking and looking at that now as a separate category in our in our award activity in our backlog as well We think that maybe helps Two things from an office standpoint. We still continue to see premium office space Projects coming forward and being awarded and green lighted And then Projects that may be on the drawing board were going to be a hundred percent or nearly a hundred percent office Kind of reshaping those to a mixed-use building has allowed those projects to get off the drawing board and get the green light to be executed so Both of those for us are positives and kind of fit into our sweet spot Both in terms of what we're trying to do with our glass business on the shift to premium and then it fits very well within our services business For what they target for project types
spk01: Really helpful and then if I could just sneak one last one in here is just on on the glass segment You know, you're pulling very well operationally there just you know How much more runway do you have left with mixed improvements in the glass segment for the rest of the year?
spk07: Well, I would start as Matt said in his comments You know, I would look at this quarter as everything went Great like everything that could go well in terms of mix in terms of price in terms of productivity in terms of Execution so I would say this this quarter is kind of a snapshot of When demands at the right level and we've got the you know The the highest mix premium mix that we can get into our bookings and revenues This is what a really great quarter would look like as he talked to I wouldn't put this now as a new benchmark that we don't expect that that to continue at that level and certainly from a margin perspective You know, we reguided to that 10 to 15 percent in good demand Markets and then seeing them on an annualized basis perform at the high end of that range is where we want to be We think that allows us to maximize the profit dollars And so we don't want to we don't want to tip over here and all of a sudden get fixated on margin percentage because That business is generating very nice return on invested capital now It's generating great income dollar growth and we want to stay focused on making sure we're at the right price points right margin level right mix That we can grow those profit dollars
spk01: Great thanks for the questions guys.
spk05: Thank
spk00: you Please stand by for our next question Our next question comes from the line of John Bratz with KCCA your line is open morning everyone Wait,
spk12: I tie a question you mentioned that
spk04: as
spk12: you look forward you're you're going to be spending some money on Organic opportunities and I guess my question is are we talking about maybe new products new geographies You know specifically what are some of the things you might be thinking in terms of organic growth opportunities?
spk07: I Would look at it if you look at our non-resi construction business, which is the bulk of our business I would I would first think about new geographies So looking at how can we expand our reach into other parts of North America? So those are areas we've looked at in the past We wanted to make sure that we are at the right margin level and understood Where we could best differentiate what's in the portfolio today? In support of that as well We we are making some capacity investments as well as some productivity investments those productivity investments Not only help us with growth, but it can help in terms of our service and lead time capabilities Which also is a way for us to differentiate So we're made we've made and are making some capital investments this year that kind of give us a combination of they'll help us on the productivity side But they're also going to give us some stronger capabilities from a service level standpoint that we think helps us Even take share in the markets that we're in You know, we're we're always introducing or working with customers from a new product perspective But I would say right now as we look at those we don't see things other than the coder investment We made in large-scale optical we don't see things that are going to take a major capital investment At this point to introduce a you know, dramatically new product offering into the market space As we look at diversification in the portfolio and you think about adding new products That really move us into other adjacencies within the in the segments. We're already playing in Acquisitions is a likely a way for us to step into that
spk12: sure sure when when you speak about new geographies organically speaking we're not talking about a new footprint, but But just expanding Existing facilities and and making those capital investments in and current facilities as opposed to new greenfields plants It
spk07: could be a combination of both But I think you'd see CSP thoughtful in how how we do that you know, I'm a I like a real options approach so if we think there's There's an untapped market that we're really missing an opportunity on let's say on the on the West Coast How would we step into that in an optional way that gives us some presence in our ability to serve the local market Before we would make major investments in terms of manufacturing say coding extruding capabilities, etc So as we look at those geographies, I think We can reach some of those with some additional capacity existing facilities Freight logistics and our ability to have short lead times will limit just how much we can do there So even an incremental step of you know, having a distribution center where else etc. There's there's there's small things we can do that to make some Minor investments to get a footprint in a market and and then prove that out before we make some significant capital investments in equipment
spk11: Okay, sounds great. Thank you very much Thanks, John
spk00: Thank you I'm sure there are no questions in the queue I will now like to turn the call back over to CEO Ty civil remarks All
spk07: right. Well, thanks everyone for joining us today Another great quarter for Apogee We couldn't be more proud of our team and the accomplishments that we've delivered to date and as we touched on We still see a lot of opportunities for our businesses. We move ahead We'll look forward to talking to everyone in the next quarter. Have a great day
spk00: Hey, I don't understand close today's conference call. Thank you for your participation. You may now disconnect
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