APOGEE ENTERPRISES, INC. Q2 FY2025 earnings call

Management Statement and Operational Highlights

• Quarter Highlights：Revenue declined compared to last year, but adjusted operating margin was 12.6% for the second consecutive quarter above 12%, and adjusted EPS grew. Cash flow from operations was exceptionally strong.
• Acquisition of UW Solutions：UW Solutions is a strong strategic fit, bringing differentiated solutions, leading market positions, and strong profitability. It complements Apogee's portfolio, with businesses like HD Printable Materials accelerating LSO's growth, ResinDEK expanding into non-residential construction, and RDC Coatings adding R&D capability. Expected to achieve $5 million in annual run rate synergies by end of fiscal '27, and contribute ~$100 million in revenue in fiscal '26 with an adjusted EBITDA margin of ~20%.

Segment Performance

• Architectural Glass：Net sales declined 4%, but operating margin exceeded expectations, improving by 490 basis points to a record 23.4% due to stronger-than-expected pricing and mix.
• Framing Systems：Net sales declined 11%, but adjusted operating margin remained within the 10% to 15% target range, with favorable material costs offsetting some negative impacts from lower volume and less favorable mix.
• Services：Net sales grew 11% due to a more favorable mix of projects and increased volume, and adjusted operating margin improved 250 basis points to 6.5%, marking the sixth consecutive quarter of sequential margin expansion. Backlog ended the quarter at $792 million, down from $867 million last quarter but up 17% year-over-year.
• LSO：Net sales declined 16% due to lower volume in the retail channel, and operating margin declined 60 basis points to 19.1% due to lower volume, partially offset by improved mix and cost savings.

Guidance

• Net Sales：Expect net sales to decline 4% to 7% for the full year, including ~2 percentage points decline due to fiscal '25 reverting to a 52-week year and ~1 percentage point decline from Project Fortify actions.
• Adjusted EPS：Increase full-year adjusted diluted EPS outlook to a range of $4.90 to $5.20, reflecting stronger-than-expected second-quarter performance.
• Margins：Full-year consolidated adjusted operating margin expected to improve to ~11%, with Glass margins moderating in the second half to the top half of the 10% to 15% target range, Framing adjusted operating margin expected to improve within the 10% to 15% target range, Services adjusted operating margin expected to approach the 7% to 9% target range in the second half, and LSO operating margin expected to decline.
• Expenses and CapEx：Corporate and other expenses expected to be ~$8 million per quarter in the second half, full-year capital expenditures $40 million to $50 million, and cash flow from operations expected to be strong but below last year's record level.

Risks

• Market Softness：Continued softness in end markets, particularly non-residential construction, may impact revenue.
• Integration Uncertainty：Uncertainties related to integrating UW Solutions, including challenges in realizing synergies and managing the integration process.
• Glass Margin Sensitivity：Glass business operating margin is highly sensitive to changes in price and mix assumptions.

Question and Answer

Q: Brent Thielman asked about cross-selling opportunities and market share of UW's businesses.

A: Ty Silberhorn responded that there are opportunities in HD Printable Materials with some customer overlap, while being cautious about crossover in the flooring business under ResinDEK but seeing growth potential.

Q: Julio Romero inquired about historical growth rate and market share of UW Solutions.

A: Ty Silberhorn and Matthew Osberg responded that the Industrial Flooring segment has seen strong growth, and the acquisition is a better together opportunity to improve on UW's performance.

Q: Jon Braatz asked about the proprietary nature of UW's coatings and their cross-cycle performance.

A: Ty Silberhorn responded that UW's coatings are proprietary with deep R&D expertise, and they saw a healthy bump in revenue during 2020-2021 due to online growth, with most recent sales being in R&R.

Q: Gowshi Sriharan asked about the $100 million forecast for 2026, CapEx related to UW, and backlog reflecting transition west of the Rockies.

A: Matthew Osberg responded that the $100 million forecast is based on current product offerings, CapEx for UW is not materially impacting current guidance, and there is promising activity west of the Rockies in services.