Apogee(APOG) - 2025 Q3 - Earnings Call Transcript

Financial Data and Key Metrics Changes - Revenue for the quarter was $341 million, consistent with last year, despite ongoing pressure from soft end market demand in non-residential construction [7][23] - Adjusted operating margin declined by 70 basis points, primarily due to unfavorable sales leverage from lower volume and higher costs [23] - Adjusted diluted EPS decreased by 3%, coming in at$ 1.19, mainly driven by lower adjusted operating income [23][32] Business Line Data and Key Metrics Changes - Framing net sales declined approximately 1% to $138 million, reflecting a less favorable product mix, while adjusted operating margin in framing decreased to 9.8% [24][25] - Glass segment saw a decline in net sales due to soft end market demand, with margins sensitive to changes in volume and pricing [25][26] - Services segment achieved 11% growth in net sales, with adjusted operating margin improving to 8.6%, marking the fourth consecutive quarter of year-over-year margin expansion [26][27] Market Data and Key Metrics Changes - Non-residential construction market remains challenging, with leading indicators like the Architectural Billing Index indicating a contracting market for over 20 months [12][15] - Interest rate-sensitive sectors such as office and commercial have been weaker, while sectors like education and healthcare continue to grow [14][15] - FMI's forecast for 2025 indicates 1% growth in the overall market, with declines in interest rate-sensitive verticals and growth in institutional verticals benefiting from government funding [15] Company Strategy and Development Direction - The company is focusing on diversifying its sales mix towards sectors with higher growth rates and leveraging the capabilities of UW Solutions for expansion into attractive market adjacencies [18][19] - The acquisition of UW Solutions is seen as a growth lever, with expectations of significant contributions to revenue and margin enhancement [10][36] - The leadership team is working on a new strategic plan to drive growth while expanding the margin profile, with details to be shared in the new fiscal year [20][21] Management's Comments on Operating Environment and Future Outlook - Management expects continued pressure in the first half of the next fiscal year, primarily in glass and framing, but remains optimistic about outperforming the industry [16][17] - The company anticipates that the downturn in construction will be short and shallow, with a focus on executing a backlog secured for much of fiscal 2026 [15][16] - Fiscal 2026 is expected to face headwinds, particularly in glass margins, but management is confident in the structural changes made to maintain target margins [37][38] Other Important Information - Cash from operations was strong at$ 31 million for the quarter, with a year-to-date total of $95 million [30] - The company executed a$ 250 million delayed draw term loan to fund the acquisition of UW Solutions, finishing the quarter with a consolidated leverage ratio of 1.3 times [30][31] - Full-year adjusted diluted EPS is expected to be at the bottom of the range of $4.90 to$ 5.20, including dilution from the UW Solutions acquisition [33] Q&A Session Summary Question: Can you discuss the end market weakness in the glass segment? - Management noted that volume pressure is significant, with expectations for continued volume decline in Q4, primarily in framing and glass [45][46] Question: What is the expected contribution from UW Solutions? - The company projects a $100 million contribution from UW Solutions in FY26 at a 20% adjusted EBITDA margin, with ongoing integration efforts [110] Question: How are the services business trends aligning with third-party forecasts? - Management indicated that the services business is expected to outperform the market slightly, despite some softness and choppiness in project awards [68][70] Question: What are the plans for capital deployment in FY26? - The company plans to focus on paying down debt while actively pursuing M&A opportunities, with a robust pipeline for potential acquisitions [56][58] Question: How does the company view the industrial flooring market's sensitivity to economic changes? - Management expressed confidence in the industrial flooring market's resilience, noting its reliance on R&R rather than new construction [92][94]