Apogee Enterprises, Inc.

Thank you for standing by. Welcome to Apigee Enterprises' third quarter earnings conference call. At this time, all participants are on a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 11 on your telephone. 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 will now send the conference over to Jeremy Steppen, 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 gap measures are provided in the earnings release and slide deck, which 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 25 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 two months as CEO have given me a deeper perspective, strengthening my confidence in Apogee's future. And 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 76 years and continues to raise the bar. Second, across Apigee, 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 Apigee 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're 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 margins. UW Solutions expands our market and geographical reach, adding substrate capabilities and coding 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 discipline and 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 improvements across our manufacturing footprint, our proven cost-out execution with Fortify Phase 1, Phase 2, and a strong balance sheet and healthy cash generation, giving 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. Number two, managing our portfolio through pursuing our creative M&A opportunities aligned with our strategic and financial objectives. And number three, strengthening 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 2. 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 four to five phase two, lower incentive compensation expense, and favorable price and product mix. These were partially offset by lower volume. 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 and organic growth primarily from price. Adjusted EBITDA margin decreased primarily driven by the dilutive impact of lower adjusted EBITDA margin from the 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 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 first quarter. Our balance sheet remains strong with a consolidated leverage ratio of 1.4 times, 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 30 cents. 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 a 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 27, 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 2 to include further restructuring actions primarily in metals and corporate. Based on the expected benefits of the expanded scope of Fortify Phase 2, we now expect to incur a total of approximately $28 to $29 million in pre-tax charges and deliver an estimated annual pre-tax 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 2 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, we will now 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 star 11 on your telephone. and wait for your name to be announced. Please stand by while we compile the Q&A roster. Now, first question coming from the line of Brent Tillman with DA Davidson. Your line is now open.

Hey, thanks. Good morning. Don, I mean, a lot has changed here since the last earnings call. And maybe if you could just start off and talk about what the board is looking for in terms of new leadership on a go-forward basis. And is there any different view on the strategic direction of the company going forward versus what's been vocalized as the strategy before, particularly sort of scaling the performance services business?

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

Okay. And sorry, Don, in terms of what you're looking for in terms of new leadership as you're out with CEO search here.

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, you know, the things that are called out in our strategy.

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

I'll let you follow up with the rest of your question.

No, just in regard to the outlook and the updated outlook, looks like it's primarily the metals segment, I presume. You know, if that's the case, Looks like you're sort of 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. So, yeah, you know, both, I would say both in metals and in glass, the market dynamics continue to be very, they continue to evolve. So, yeah, back on metals, the primary issue there is, the aluminum prices continue to increase. In our prepared comments, we commented that between Q2 and Q3, aluminum prices went up 13%. And then even here in December, we're seeing continued increases in that price. So the margin pressures continue to build. And then maybe a little bit in glass as well. We have about a 60-day window on what we can see for orders. At the end of Q2, we thought that we would kind of maintain that level, but we're seeing slightly 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 to the best of our abilities, we're controlling costs and implementing things that we can control those costs, four to five phase two expansion as an example.

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've laid out before still sort of appropriate to think about? Again, 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. Okay. Thank you. I'll pass it on.

Thank you. Our next question in queue coming from the line of John Press with KCCA, your line is now open.

Hello?

Hi, John.

Oh, I'm sorry. I missed my cue. Don, I just want to go back to the sort of 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 just, it hasn't turned out that M&A activity hasn't been that positive for Apogee and it seems to me the focus should be almost exclusively on running the business as possibly as possible, returning cash flow to shareholders in terms of dividends and share repurchases. So I want to get a better sense from you as to where you see M&A going forward.

Well, look, our pipeline for M&A is robust. It's very active right now. And, you know, we have spent a great deal of time and energy building all the processes and systems in the company to continue to drive M&A. UW Solutions was a great, a great acquisition for us. 12 months in, we have achieved or beat all of our objectives. So, you know, it's a business that's growing robustly. You know, our performance services business, that segment was able to successfully integrate the UW solutions, almost doubling the size of the business, and deliver organic growth at the same time. So we've demonstrated that we can execute, we can select a great acquisition that works in our strategy. We have the discipline to execute on the integration, and 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 will be incurred and savings of $13 to $15 million. And this quarter, you said costs of $28 to $29 a little bit higher, but savings of $25 to $26 is What's the difference between the fourth quarter savings and what you said here in the first quarter? Did I have something wrong there?

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

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

Yep, that's what we're showing.

Okay. All right. All right. Thank you.

Thank you. Our next question coming from the lineup, Galaxy Street with Singular Research. Your line is now open.

Good morning. Can you hear me?

Yes, loud and clear.

Thank you. Thank you for taking my questions. 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 six months? I mean, have you walked away from any large projects or packages that might recently, that might leave kind of under-absorption risk in early fiscal 27, and are you willing to, or when will you start considering the flexibility around the pricing discipline?

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

Don, I don't really have anything to add. I think you covered off what I thought was important, which is, you know, we implemented some really, really nice and solid pricing strategies as we were executing our initiating our current strategy. And we intend to continue on that process. Of course, you know, volume matters. So we need to look at every project and every opportunity when they come across.

The other thing I would mention is, as was pointed out, Fortify 1, Fortify 2, we continue to actively manage our cost structure to mitigate these short-term headwinds. So in addition to making sure that we hold onto our margins and manage the top line appropriately. We're also managing our cost structure.

And are you seeing any noticeable pricing differences between, say, your strategic repeat customers as opposed to your more transactional work? Has that kind of widened or narrowed since we spoke in Q2?

No, I don't think so. You know, I think we're – look, we're seeing higher volume of projects in glass, for sure. And, you know, on average, they're a little smaller than what we've seen in the past. Yep. Primarily – It's a very challenging environment. There you go. Thank you. Yes.

And on the performance services side, can you kind of unpack on how much of that growth is coming from the high-margin SKUs versus kind of mid-tier offerings – And with the current mix, would you adjust your long-term margin aspirations for that segment?

Well, we've – so we've mentioned this in past quarters. We took some share over the past few quarters in our distribution business. So these are – think of it as retail shelf space, okay? So we've expanded our shelf space. A couple years ago, we lost some, and we gained that back. And – that is a very attractive business. Gotcha. The other area that 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. So this is a growth area and has demonstrated some nice organic growth for us.

In our highest performing segment. Yeah, highest margin segment.

I'll make this my last question. I know you've highlighted the lower incentive compensation as a tailwind to margin across several segments. I know I think you've alluded that there will be some kind of normalization in the incentive segment. But how should we think about from a sustainability and talent standpoint? Are you structurally resetting some of that incentive programs, or is this paying below at a tough year? Are you, as you look at the labor market in your key regions, are you comfortable with the overall comp structure remains competitive enough to execute Project 45 and your growth plans?

Yeah, we believe our structure is fine. We just entered into a more difficult year and we're 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.

Thank you. Our next question coming from the line of Julio Romero with Sonoti, Milan is now open.

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

Well, first of all, we'll be – The strategy that we're focused on hasn't changed. So we remain focused on becoming the economic leader in the target markets we serve, managing our portfolio, and strengthening the core. So 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, new products that will enable us to grow faster. and as part of our managing portfolio strategy we continue to look for new opportunities along those lines so looking for acquisitions that will enable faster growth and that higher emergence we're going to we're going to talk a lot more about that on our next call when we talk about fiscal year 27. okay understood um i guess maybe can you

dig into a little bit into the priorities that are more near term in nature. Obviously, you have project fortify expansion. But any other kind of quicker turn winds or low hanging fruit that you're looking to kind of achieve early on?

Well, delivering the results, you know, delivering our results will be critical. You know, we're, we're focused on delivering the year right now. I mean, that's, that's front and center.

Julie, I would just add, yes, Project Fortify Phase 2 is probably the most important, but I would suggest that, you know, we're amping up AMS. Again, as we think about, you know, how we're trying to drive 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.

I mean, to Frank, so AMS, I mean, that's one of my observations for my first 60 days. The operational excellence and productivity improvements that we've been able to deliver through AMS are truly extraordinary, especially in the glass business, overseeing strength across the board, safety, quality, on-time delivery, you name it. And, by the way, that was the birthplace of AMS. So, you know, they're leading the way, and it shows what we can do with the rest of the company. So it'll be a key focus for us. The last thing is, I think I mentioned a couple times, but creative M&A, it's front and center, too. We have a robust pipeline, and we're active.

Got it. And I guess just going back to my first question a little bit more, and it ties into your comment about robust M&A pipeline, do you see any kind of – you know, viewpoint difference with regards to yourself versus the last management team with regards to kind of, you know, IRR hurdles or rate of return hurdles when you look at that M&A and kind of moving forward with that?

No, I don't think any difference in the financial analysis, but I would say, you know, move faster. And, you know, we move with discipline, of course, but also how faster.

Got it. That's helpful. I appreciate it. And then the last one for me would just be on, you know, you gave some preliminary commentary on your fiscal 27. You know, you talked about you don't expect the tariff impact to reoccur in fiscal 27, but any other kind of high-level thoughts with regards to how you see, you know, the possibility of revenue or profit growth in 2017?

Yeah, I guess I'll reiterate, you know, we're kind of in the process right now of our doing our AOPs. We highlighted what I view are the key tailwinds and headwinds that we have in front of us, tailwinds being project four to five phase two, and the tariffs not repeating. And the headwinds, of course, we've covered now several times with normalization of incentive comp. And certainly aluminum prices will continue to be monitored as we go through the fourth quarter and as we scenario plan our AOP.

Helpful. Best of luck, guys. Thanks. Thank you.

Thank you. And I'm showing over the questions in queue at this time. I will now turn the call back over to Donald 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 outlets. I hope you have a great week.

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