Apogee Enterprises Inc 2027 Q2 Earnings Call

Good morning, and welcome to Apogee Enterprises' Fiscal 2027 second quarter earnings call. On the call today are Don Nolan, Apogee's Chief Executive Officer, and Mark Augdahl, our Chief Financial Officer. During this call, the team will reference certain non-GAAP financial measures. Definitions of these measures and a reconciliation to the nearest GAAP measures 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 appreciate you joining us today. I'm pleased to report strong second quarter results that exceeded our expectations and continued the momentum we established in the first quarter. Revenue was $391 million, up more than 9%, and adjusted EPS was $1.17, reflecting disciplined execution across the business. We benefited from swift pricing actions, productivity improvements, and the favorable contribution from our recent acquisition of Kalwall. Based on our stronger than expected first half performance, we are raising our fiscal 2027 outlook for both net sales and adjusted diluted earnings per share. Across our segments, we continue to make meaningful progress on pricing disciplines, productivity, and operating improvements, demonstrating our ability to execute effectively despite evolving macroeconomic conditions.

We're advancing our strategic priorities through the acquisitions of Kalwall and Groglass, expanding our differentiated product offerings and technical capabilities while increasing our exposure to attractive end markets. We are also building on the successful integration of UW Solutions and the first-year performance as Apogee delivered on our deal model targets. This proven execution strengthens our confidence in successfully integrating these businesses and achieving their first-year financial objectives. In Metals, revenue and profitability improved year over year as pricing actions, productivity initiatives, and Fortify Phase 2 cost savings continued to gain traction. We also continued to enhance operational execution through improvements in quality, on-time delivery, and customer engagement. Services delivered their 10th consecutive quarter of top-line growth while increasing their backlog again this fiscal year.

Strong award activity resulting in continued backlog expansion demonstrates our ability to consistently win new business and support our confidence in the segment's long-term growth potential. Performance Surfaces delivered another strong quarter of revenue growth, reflecting continued demand for our differentiated products, and reflects positively on our strategic initiative to acquire businesses that have a greater growth profile. As material inflation increased, we maintained pricing discipline and realized the benefits of pricing actions implemented earlier this year. We will continue to actively manage pricing to preserve margins and offset inflationary pressures. In our legacy glass business, while market conditions remain challenging, we made meaningful progress during the quarter against the action plan we outlined previously. We have advanced several commercial initiatives aimed at increasing demand, implemented productivity improvements across our operations, and remain disciplined on costs.

While we still have work to do and the broader market remains pressured, we are encouraged by the progress achieved to date and believe the actions underway are helping position the business for improved performance and stronger profitability over time. Across the company, we are seeing the benefits of the actions we've taken over the last year reflected in our results. While market conditions remain mixed, our focus on pricing, productivity, operational execution, and disciplined cost management continues to strengthen the business and supports our confidence in the increased outlook we announced today. In September, we announced our second acquisition of the fiscal year as we continue to execute our growth strategy while maintaining a disciplined approach to capital allocation. With Groglass, we are adding a highly differentiated business with leading technology, strong customer relationships, and compelling growth opportunities.

The acquisition supports our strategy of investing in higher value products and capabilities that improve the quality and durability of our portfolio, and we are excited about the opportunities ahead as we welcome the Groglass team to Apogee. As part of Performance Surfaces, Groglass will expand our technical capabilities and further increase our exposure to attractive, higher value end markets. This will strengthen our presence in Europe while supporting broader global opportunities. We believe the business will enhance our profitability profile and accelerate value creation over time. As we begin integrating Groglass, our focus will be on disciplined execution and delivering the strategic and financial benefits that supported our investment thesis. Turning to Kalwall, I continue to be pleased with our progress following the acquisition.

As discussed last quarter, our focus has been on preserving the strengths that made Kalwall successful, while thoughtfully integrating the business into Apogee. Integration activities across finance, human resources, sales and marketing, and other key functions are progressing as planned, and collaboration between Kalwall and Apogee teams has been very strong. Importantly, our confidence in the strategic and financial rationale remains high. Kalwall continues to perform in line with our expectations, and we remain on track to achieve the first 12-month financial targets. We continue to see the opportunities to leverage Kalwall's differentiated daylighting solutions and specification-driven business model, while expanding relationships with architects, designers, and glazing contractors across the broader Apogee portfolio. Overall, I'm encouraged by the progress we're making across the organization.

Strong execution, continued advancement of our strategic priorities, and disciplined capital allocation are strengthening Apogee's growth and profitability profile and positioning us well to create long-term shareholder value. With that, I'll turn the call over to Mark to provide additional detail on our financial results and outlook.

Thanks, Don, and good morning, everyone. Let me begin with a review of our second quarter performance and then discuss our updated outlook for the remainder of fiscal 2027, which reflects our strong first-half performance and confidence in the business. Beginning with our consolidated results, net sales increased 9.2% to $391.1 million. The improvement was primarily driven by inorganic growth from the Kalwall acquisition, favorable price across most segments, and positive mix. This was partially offset by lower volume in Metals and Glass as challenging market conditions persisted during the quarter. Adjusted EBITDA margin increased to 12.7% from 12.4% a year ago, driven by favorable price, productivity improvements, Fortify Phase 2 cost savings, and the accretive impact of the Kalwall acquisition. Those were partially offset by higher material and manufacturing costs and the impacts from lower volume.

Adjusted diluted EPS improved over 19% to $1.17, exceeding our own expectations and reflecting improved operating performance across the business, along with lower interest expense. Turning to our segment results, Metals net sales increased 1.8% to approximately $144 million, largely due to favorable price, partially offset by lower volume. Adjusted EBITDA margin expanded to 15.4%, driven by favorable price, increased productivity, cost savings from Fortify Phase 2, and favorable mix. Partially offsetting these benefits were higher aluminum costs and lower volume. The Services segment delivered its 10th consecutive quarter of net sales growth, improving by almost 8%, primarily driven by volume. Adjusted EBITDA margin increased to 5.8% due to project mix and higher volume. Backlog ended the quarter at $833 million, up 5% year-over-year and 13% sequentially, reflecting continued success with project awards in a highly competitive environment.

Glass net sales increased over 21% to $87.4 million, primarily driven by a $16.4 million contribution from the Kalwall acquisition and favorable mix. That was partially offset by lower volume and price as end market demand softness persisted. Adjusted EBITDA margin declined to 14.9%, but greatly improved sequentially from 8.7% in the first quarter. The year-over-year change was due to lower price, higher manufacturing and freight costs, and lower volume, partially offset by the accretive contribution of the Kalwall acquisition and favorable mix. As Don mentioned, we are pleased with the progress of the Kalwall integration, and the business continues to perform in line with our acquisition expectations. We remain on track to deliver the first 12-month financial targets of approximately $85 million in revenue and a 15% adjusted EBITDA margin.

Turning to Performance Surfaces, the segment delivered another strong quarter, with net sales increasing by over 14% to approximately $55 million, driven by higher volume and favorable price. Adjusted EBITDA margin decreased to 22.5% due to higher material costs, partially offset by price and higher volume. Looking at cash flow and the balance sheet, year-to-date net cash provided by operating activities was $43.3 million, compared to $37.3 million a year ago. In the second quarter, we repurchased $6.4 million of stock and returned $5.5 million to shareholders through dividends. Our balance sheet at the end of the quarter was strong, with consolidated leverage ratio of 1.7 times, no near-term debt maturities, and significant capital available for the Groglass acquisition and other future deployments. Before turning to the outlook, I'd like to briefly comment on our recent acquisition of Groglass.

We are excited about the opportunities this acquisition creates for Apogee, adding highly differentiated technology, broadening our reach into attractive end markets, and further expanding the capabilities of our Performance Surfaces segment. Based on our current expectations, we anticipate approximately $30 million in revenue and a 25% adjusted EBITDA margin in the first 12 months. We believe Groglass is a highly complementary addition that will enhance our long-term growth and profitability profile of both Performance Surfaces and Apogee as a whole. Turning to our outlook, we are raising our fiscal 2027 net sales and adjusted diluted EPS guidance. These revised expectations reflect our strong first half performance, continued execution across the business, the anticipated contributions from Kalwall and Groglass, and current market conditions. We now expect net sales between $1.46 billion and $1.5 billion, and adjusted diluted EPS in the range of $3 to $3.40.