Yahoo Finance Apogee Enterprises, Inc. (NASDAQ:APOG) Q1 2025 Earnings Call Transcript
Apogee Enterprises, Inc. (NASDAQ:APOG) Q1 2025 Earnings Call Transcript June 27, 2024
Apogee Enterprises, Inc. beats earnings expectations. Reported EPS is $1.44, expectations were $1.16.
Operator: Good day and thank you for standing by. Welcome to the Q1 2025 Apogee Enterprises Earnings Conference Call. At this time, all participants are in a listen-only mode. Please be advised that today's conference is being recorded. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] I would now like to hand the conference over to your speaker today, Jeff Huebschen, Vice President of Investor Relations.
Jeff Huebschen : Thank you, Josh. Good morning, everyone, and welcome to Apogee Enterprises' Fiscal 2025 First Quarter Earnings Call. With me today are Ty Silberhorn, 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-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 Apogee's business and financial results can be found in today's press release and in our SEC filings. With that, I'll turn the call over to you, Ty.
Ty Silberhorn : Good morning, everyone. Thanks for joining us today. We had a good start to our fiscal year with our team continuing to build on the progress we've achieved through our strategic initiatives. We drove operational execution across the business and achieved significant adjusted operating margin expansion and EPS growth. Today I'll discuss a few highlights from the quarter and comment on how we are continuing to position the company for growth. Then Matt will provide details on the quarter and our updated outlook. As expected, we saw lower volume and revenue in both framing systems and architectural glass this quarter. This was partly due to continued deceleration in some of the end-markets we serve, and partly due to our strategic shift away from less differentiated lower margin products.
Even with the lower revenue, both framing and glass delivered strong profitability. Both segments improve their adjusted operating margins, due in part to good cost management and productivity gains. Architectural Services was also a meaningful contributor to our year-over-year profit improvement. Services delivered double-digit sales growth and significant margin expansion compared to last year's first quarter. These positives enabled us to achieve adjusted operating margin of 12.8%, the highest in our company's 75 year history. When we first embarked on our new strategic direction, we had confidence that our company could achieve operating margins above 10%. We were proud to be able to deliver margins above 10% in fiscal '24 and we expect to improve on that in fiscal '25.
We remain focused on maximizing profit dollars within our segment margin target ranges. And in the first quarter, we were able to increase adjusted operating income by 26%. With this strong earnings result, we are increasing our EPS outlook for the full year. Our performance this quarter demonstrates the sustainable operating improvements we've achieved through executing our strategy. Each of our four segments has made progress toward becoming an economic leader in the markets they serve. Our goal is to be a top margin generator in each of our target markets. To achieve this, we've established a much more competitive cost structure, developed a relentless focus on operational execution and productivity, and we’ve increased our mix of differentiated product and service offerings with an effort to deliver more value for our customers, allowing us to capture some of that value and allow us to gain share in our markets.
The recent actions of Project Fortify continued to build on this progress, further improving our cost structure and better positioning the business for long-term, more profitable growth. We've also had great success strengthening our core capabilities. The foundation of this is our Apogee Management System, or AMS, which has helped us achieve meaningful productivity improvements. We've continued our shift from a decentralized operating model, building center-led functional capabilities that better support the business. And we made significant strides in improving talent management and leadership development across the company. These strategic actions have laid the foundation for the profitability improvements that we are achieving. It also positions us well to integrate future acquisitions to drive both cost and growth synergy delivering more value for our customers and our shareholders.
Looking ahead to the rest of the fiscal year, we continue to see a mixed picture for our end markets, as shown on Slide 6. We expect continued headwinds in some construction market verticals, including office and commercial. Declines in the Architectural Billing Index point to a slowdown in construction activity. This will likely pressure volumes and/or pricing in our Architectural segments. On the positive side, we anticipate continued growth in institutional and infrastructure projects supported by significant government funding. Regardless of the macro environment, our team is focused on delivering results, while positioning the company for long-term growth. We are managing what we can control, working with a growth mindset, continuing to drive productivity gains and prudently managing our costs.
Our company is also positioned to gain share in our core markets. The combination of leading brands, deep customer relationships and differentiated offerings, provides a meaningful competitive advantage. We are also making investments to accelerate our growth. This includes the capacity expansion in large-scale optical, which we expect to be completed this fiscal year and will allow LSO to expand into attractive market adjacencies. We're also investing to add capabilities in our architectural segments and to enable further geographic expansion in both Framing and Services. Finally, we continue to work our acquisition pipeline, evaluating opportunities that complement our strategy and would be accretive to our financial performance. With that, let me turn it over to Matt.
Matthew Osberg: Thanks, Ty, and good morning everyone. I will begin with a discussion of our first quarter results and then provide an update on our fiscal year outlook. For the first quarter although we posted a decline in net sales, we were pleased to deliver EPS growth ahead of our expectations. As we discussed in the fourth quarter conference call, we anticipated lower sales levels in the first quarter due to softness in our end markets and as a result of the actions of Project Fortify. These factors contributed to an 8% decline in consolidated net sales driven primarily by Framing and Glass. Despite lower sales, adjusted operating margin improved 350 basis points to 12.8% driven by a more favorable mix of projects and services, favorable material costs, lower insurance-related costs, productivity gains and lower bad debt expense.
Adjusted diluted EPS grew 37% to $1.44 driven primarily by higher adjusted operating income and lower interest expense. Turning to the segment results. Framing net sales declined 19%, primarily due to lower volumes and our strategic shift away from certain lower margin products as part of Project Fortify. Adjusted operating margin for framing increased 240 basis points to 14.5% primarily driven by favorable material costs, favorable mix, productivity gains and lower bad debt expense which offset the impact of lower sales volume. Net sales in Glass declined 11% primarily due to lower volume. Glass operating margin continued to exceed our expectations, improving by 270 basis points to 19.7%, primarily driven by productivity gains and improved pricing.
Services net sales grew 11%, primarily due to a more favorable mix of projects and increased volume. Operating income was $5.6 million, returning to more normal profitability levels compared to the operating loss in last year's first quarter. Services backlog ended the quarter at $867 million. This is 7% higher than last quarter and 22% above the same quarter last year. This is the third consecutive quarter of backlog growth for Services and reflects a diverse set of project wins in the health care, education and recreation sectors. LSO net sales were down 6%, primarily due to lower volume in our retail channel, partially offset by a more favorable mix. Operating margin declined 170 basis points to 22.9% reflecting the impact of lower volume, partially offset by cost savings and improved mix.
Corporate and other expenses came in at $4.5 million down from $7.6 million in last year's first quarter, primarily due to lower insurance related costs. Turning to cash flow and the balance sheet. Cash from operations was $5.5 million down from $21.3 million in last year's first quarter, primarily driven by an increase in cash used for working capital. As a reminder the first quarter is typically our lowest cash flow quarter of the year, due to the timing of incentive and other annual payments. Our primary uses for cash in the quarter were $15.1 million of share repurchases and $7.2 million of capital expenditures. Our balance sheet remains in a very strong position with very low debt and no near-term maturities. We finished the quarter with a net leverage ratio of 0.2 times trailing 12-month adjusted EBITDA.
Moving to our outlook for the full fiscal year. We continue to expect net sales to decline 4% to 7%. This range includes approximately 2 percentage points of decline related to fiscal '25 reverting to a 52-week year and approximately 1 percentage point of decline related to the actions of Project Fortify. Also, as Ty discussed we continue to expect softening end-market demand to put pressure on volume and pricing, particularly in Framing and Glass. We expect sales declines in Framing and Glass to be partially offset by growth in services as we execute a strong pipeline of projects in our backlog with sales in LSO approximately flat as retail channel headwinds offset new channel adjacency growth. We now expect full year consolidated adjusted operating margin to improve compared to fiscal '24 primarily driven by the strong margin performance in the first quarter.
However, we expect adjusted operating margins will decline sequentially throughout the remainder of the fiscal year, primarily due to lower volumes and pricing pressure in Framing and Glass. At the segment level, we continue to expect framing adjusted operating margin to improve compared to fiscal '24 and be within the target range of 10% to 15%. We continue to expect Glass operating margin will moderate compared to fiscal '24, but be towards the top-end of the 10% to 15% target range, with margins declining sequentially throughout the rest of the year. We continue to expect Services margins will improve sequentially throughout the fiscal year, moving closer to the 7% to 9% target range. We continue to expect LSO operating margin will decline as we expand into new adjacencies and begin to depreciate the capital assets for our capacity expansion, but will remain above the 20% target range.
Finally, we expect corporate and other expenses to be approximately $7 million per quarter for the rest of the fiscal year. We are increasing our outlook for adjusted diluted EPS to a range of $4.65 to $5, primarily reflecting our stronger than expected first quarter performance. As a reminder, we anticipate the reversion to a 52-week year will reduce adjusted diluted EPS by approximately $0.20. We continue to expect an effective tax rate of approximately 24.5% and full year capital expenditures of $40 million to $50 million. We also continue to expect lower full year cash flow from operations compared to fiscal '24, as the working capital changes that impacted the past two years normalizes. In conclusion, we are proud of how our team continues to execute across the business, acting on opportunities to improve productivity and reduce costs, while taking the right steps to position the company for improved long-term growth.
We continue to build a stronger foundation through executing our strategy, and our healthy balance sheet enables us to invest in our business, actively seek accretive acquisition opportunities and return cash to shareholders. With that, I'll turn it back over to Ty for some concluding remarks.
Ty Silberhorn: Thanks, Matt. Let me wrap up by once again recognizing our team for another solid quarter. I'm proud of how they are navigating through challenging market environments to continue delivering improved profitability. Our results this quarter position the company for another year of adjusted operating margin expansion and adjusted EPS growth. We are focused on delivering near-term results with our priority working to drive long-term shareholder value. With that, we are ready to take your questions.
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