Earnings Call Transcript - APOG Q1 2026

Operator, Operator

Good day and thank you for standing by. Welcome to the Q1 2026 Apogee Enterprises Earnings Conference Call. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Nick Manganaro. Please go ahead. Thank you. Good morning and welcome to Apogee Enterprises Fiscal 2026 First Quarter Earnings Call. Please note, there are slides to accompany today's remarks. These are available in the Investor Relations section of Apogee's website. During this call, the team will reference certain non-GAAP financial measures. Definitions of these measures and the reconciliation to the nearest GAAP measures are provided in the earnings release and slide deck that were issued this morning. 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 today's press release and in the company's SEC filings. On the call today are Ty Silberhorn, Apogee's Chief Executive Officer; and Matt Osberg, the company's Chief Financial Officer. Ty will start the call with a review of the company's Q1 results then discuss the outlook for fiscal 2026. Matt will then provide additional details on the quarter and the full year outlook. With that, I'll turn the call over to Ty.

Ty Silberhorn, CEO

Thanks, Nick. Good morning, everyone. Our first quarter results exceeded our expectations, demonstrating that we are building positive momentum through our operational actions and renewed focus on growth. Revenues came in stronger than we expected, led by Glass and Services, which also contributed to the bottom line. Services had significant net sales growth for the fifth consecutive quarter, as we continued to leverage our recent capacity investments to enable growth. Metals gained top-line momentum as we progressed through the quarter. While increased tariffs did impact our results in both Metals and Services, we continued to successfully execute our mitigation plans. Barring any material change in trade policy, we expect to substantially mitigate the impact of tariffs on the second half of our fiscal year. During the quarter, we also took aggressive actions under the second phase of Project Fortify, which will drive $13 million to $15 million of annualized savings. Looking ahead, we are raising our fiscal year outlook for both revenue and earnings, as we're building positive momentum in three key areas. First, Metals made solid sequential improvement from Q4 and we expect continued sequential improvement in our Q2, raising margin performance with operational improvement, cost and price actions. Second, the revenue pipeline for Glass is picking up and positioning that segment for revenue growth beginning in Q3 and into Q4. Third, Performance Surfaces not only grew in Q1 as we continued to benefit from the inorganic contribution of UW Solutions, but also continues to execute well and is driving their sales pipelines across the portfolio. We expect Performance Surfaces to deliver strong inorganic and organic growth during the rest of our fiscal year. This will be driven by industrial flooring and renewed distribution gains for their legacy glass and acrylic products. Additionally, our recent investments in capacity expansion and the acquisition of UW Solutions leverage our core technical strengths to expand our market reach and broaden our product offerings. Now from a macro perspective, while market challenges remain, we continue to focus on what we can control. We are improving our outlook through the success of our tariff-mitigation efforts. We continue to drive productivity through AMS. We are taking aggressive actions on Fortify Phase 2, and we continue to work our acquisition pipeline to expand our reach through new offerings and new geographies. We continue to see solid M&A opportunities that support our strategy and would be accretive to our long-term financial profile. Based on the Q1 results and our forecast for the rest of the year, we are pleased to raise our fiscal year outlook for net sales and EPS, as we build momentum for what we expect will be a strong second half. This will likely be driven by Performance Surfaces' inorganic and organic growth as well as improved Glass results. We remain focused on sustaining the progress we've made executing our enterprise strategy, and we are striving to deliver near-term results while continuing to invest in long-term growth opportunities. With that, I will turn it over to Matt.

Matthew Osberg, CFO

Thanks, Ty, and good morning, everyone. First, I'll begin with a review of the results for the first quarter and then follow with commentary on our revised outlook for fiscal '26. Beginning with our consolidated results. Net sales increased 4.6% to $346.6 million primarily driven by $22 million of inorganic sales from the acquisition of UW Solutions. This was partially offset by lower volume in Glass and a less favorable mix in Metals. Adjusted EBITDA margin decreased to 9.9%. The decrease was primarily driven by a less favorable mix and higher aluminum costs in Metals as well as higher tariff expense in Services, partially offset by lower long-term incentive compensation expense. Adjusted diluted EPS declined to $0.56 primarily driven by lower adjusted EBITDA, higher interest expense, and a higher adjusted effective tax rate. Turning to our segment results. Metals net sales declined 3.4%, primarily reflecting a less favorable mix, partially offset by higher volume. Adjusted EBITDA margin decreased to 7.3% primarily driven by less favorable mix, higher aluminum costs, unfavorable productivity, and unfavorable sales leverage, partially offset by the impact from higher volume. Our Services segment delivered its fifth consecutive quarter of year-over-year net sales growth, with sales increasing 7.6% primarily due to higher volume. Adjusted EBITDA margin decreased to 5.7%, primarily driven by higher tariff expense, partially offset by a more favorable mix of projects and favorable sales leverage. Excluding incremental tariff expense, adjusted EBITDA margin for the segment improved versus Q1 last year. Glass net sales declined and adjusted EBITDA margin moderated from the elevated levels in Q1 last year as expected, primarily due to reduced volume from lower end-market demand. Performance Surfaces net sales increased driven by the inorganic sales contribution from the UW Solutions acquisition. Adjusted EBITDA margin declined to 18.8%, primarily driven by the dilutive impact of lower adjusted EBITDA margin from UW Solutions, unfavorable mix, and increased corporate allocation expense. Turning to cash flow and the balance sheet. Net cash used in operating activities was $19.8 million compared to $5.5 million of net cash provided by operating activities a year ago. The change was primarily driven by lower net earnings and an increase in cash used for working capital, including a net payment of $13.7 million for the settlement of an arbitration award. Our balance sheet remains strong with a consolidated leverage ratio of 1.6, no near-term debt maturities, and significant capital available for future deployment. Turning now to our outlook for fiscal '26. We've raised our outlook for both net sales and adjusted diluted EPS. We now expect net sales in the range of $1.40 billion to $1.44 billion, and adjusted diluted EPS in the range of $3.80 to $4.20. This outlook includes an updated estimate of the unfavorable EPS impact from tariffs of $0.35 to $0.45, which will primarily impact the first half of the fiscal year before our mitigation efforts take full effect. This range is favorable to what was provided in our April call as our team has done great work to reduce the anticipated impact of tariffs on the year. We expect our second quarter results to sequentially improve as compared to our first quarter results, with year-over-year net sales and adjusted EPS growth expected in the second half of the year. Our updated outlook assumes an adjusted effective tax rate of approximately 27.5% and capital expenditures between $35 million to $40 million. Overall, I am pleased with the way we were able to deliver results ahead of our expectations for the first quarter and raised our outlook for the year, while continuing to execute our strategic initiatives that will set us up for growth in the second half of the fiscal year. Also, as Ty noted, we continue to actively build a pipeline of strategic M&A opportunities to utilize our strong balance sheet to add offerings and capabilities that could further diversify our business mix and provide vectors for accelerated growth. With that, I'll turn it back over to Ty for some concluding remarks.

Ty Silberhorn, CEO

Thanks, Matt. I'm really proud of the way the team is executing on our approach to fiscal '26, with a focus on balancing near-term performance, while driving long-term growth opportunities. To sum up our revised outlook, we see momentum building for our second half driven by continued improvement in Metals, growth in Glass revenues, and strong organic growth in Performance Surfaces. We continue to focus on what we can control, driving tariff mitigation, delivering on Fortify Phase 2, and continuing to build our growth prospects both organically and inorganically. Thanks to our team's efforts, we are raising our fiscal '26 outlook for net sales and adjusted diluted EPS as we build momentum for what we expect to be a strong second half. With that, we'll now open the call to questions.

Operator, Operator

Our first question comes from Brent Thielman at D.A. Davidson.

Brent Thielman, Analyst

I want to start by asking if you could elaborate on the Glass business. You mentioned that the revenue pipeline seems to be improving. I would like to get more details about what you are observing that gives you the confidence for a potential increase in the second half of the year.

Ty Silberhorn, CEO

Yes. As we look at the work the team is doing, when we look at that business, we have pretty good visibility six months out. It starts to get a little fuzzy as we get nine and twelve months out. The team has really done some great work in building the rigor around their opportunity pipeline. And while they're still focused on the shift to premium, recognizing softness in the market, they pivoted nicely to be able to go after some smaller jobs, jobs that they typically would not chase, so smaller square footage per job. But that has allowed them to fill in some of the gaps that otherwise would be seeing the softness in the market. The productivity they continue to drive in their facilities allows them to do that and still effectively stay within their margin range. So we have a regular rhythm now where monthly and quarterly, we're going deep with each of the businesses on their sales opportunity pipelines. That team has done a really great job of building that up. So we like the momentum, and we've seen them each month as we move through our first quarter, gaining more confidence on what they were seeing both in terms of quote activity as well as their award rates.

Matthew Osberg, CFO

Yes. I'd just add to that, Brent, this is Matt. I’d like to emphasize that, as we've mentioned before, we are actively collaborating with that team and all our teams to focus on how they can enhance EBITDA dollars. This involves adjusting pricing and exploring market opportunities. As Ty pointed out, they are considering a broader range of opportunities and striving to optimize pricing while remaining within our long-term margin range to maximize the EBITDA dollars we generate.

Ty Silberhorn, CEO

And in Q3, just to clarify, we think Q2 will still resemble Q1. However, as award rates are coming through, we anticipate growth in both the top and bottom lines accelerating in Q3 and Q4.

Brent Thielman, Analyst

Yes. Okay. Understood. That's great. And then in terms of the segment margin targets, I guess, to the long-term targets for the different business groups, it sounds like you think you can stay within kind of that long-term range in Glass for this year. Could you speak to the other business segments and your ability to operate within these ranges that you've provided in the deck?

Ty Silberhorn, CEO

Yes, I'll begin and then Matt can add some details. The first thing to highlight is that Metals and Services are facing significant challenges due to tariffs. As they begin to recover and our mitigation strategies are fully implemented in the second half, they have a deficit to address from Q1 and Q2. We would be satisfied if they reach the lower end of their target ranges. For Metals, the adjusted EBITDA range is 13% to 18%, and for Services, it's 8% to 10%. Given the difficulties they've encountered in the first half, it may be challenging for them to reach the bottom of those ranges, but that's what we are hopeful for as we look ahead. Regarding Glass, as Matt mentioned, we've adjusted our expectations, aiming for growth in EBITDA dollars of 15% to 20%. Due to the types of projects they're pursuing, they may fall within that range but likely at the lower end. In Services, depending on the mix, they are definitely within the range; the question is whether they hit closer to 20% or land in the mid-20s in adjusted EBITDA based on how the mix evolves. However, they are becoming more confident in the organic growth outlook for the combined businesses, which we anticipate will begin to materialize in Q2.

Matthew Osberg, CFO

Yes. I would like to reiterate what Ty mentioned. I want to add that, as I noted in my remarks, if you examine the quarterly results for Services from a margin standpoint, they would have been within an acceptable range if not for the effects of tariffs, and there is year-over-year margin improvement. Therefore, I want to highlight that this factor does impact both Services and Metals this year regarding margins.

Brent Thielman, Analyst

Okay. Maybe last one for me, just on Performance Surfaces. I think you mentioned distribution gains for the legacy products? Are you essentially getting more shelf space market share? Can you just talk about what you're seeing there?

Ty Silberhorn, CEO

Yes. Think of it as shelf space in retail and custom framing shops distribution, which we had lost some of that last year. So they've regained that. And also adding product, so getting some of those retail outlets to add product as well.

Julio Romero, Analyst

I wanted to talk about the Metals segment for a bit. You talked about month-to-month sequential improvement you saw in the first quarter. Can you talk a little bit about what's driving that momentum? Did that continue into June? And have you seen any change in demand from an end-market perspective at this point?

Ty Silberhorn, CEO

Yes, I'll start, and Matt can also provide additional insights. Throughout the quarter, we experienced month-to-month improvements. Each month, we noticed operational enhancements taking shape. In the fourth quarter, we faced significant challenges related to some operational issues and the prior year's consolidation efforts, which we worked hard to address. We decided to confront those issues head-on and move forward. As a result, we began to see positive outcomes in the second and third months. A key aspect of that business is their capacity to maintain shorter lead times and high on-time delivery rates. They certainly struggled with that in the fourth quarter and even towards the end of the third quarter. Our team, along with customer feedback, indicates they are not yet back to the standard they should meet, or where they have been historically regarding service reliability and lead times, but they are showing improvement each month. As lead times and on-time delivery have improved, we have started to see some sales revival. Their weekly sales order rates are on the rise again. While some of this can be attributed to market conditions, a larger portion is due to their commitment to fulfilling customer expectations, which is helping to rebuild customer confidence and drive additional orders.

Matthew Osberg, CFO

Yes. The only thing I'd add to that, Julio, is if you look at their sequential trend, sales and EBITDA margin from Q4 to Q1, you obviously see improvements in both. And as Ty said, a lot of productivity improvements, operational improvements. Q1 did have the weight of some higher aluminum costs that they weren't able to take pricing for. So as we think about those impacts, we call that an indirect tariff impact. We expected that in Q1. That's weighing on their margins in Q1. And as we think Q1 to Q2, we do expect sequential improvement again in Metals. And they'll have pricing in place that reflects some of the new costs, as well as continuing to improve some of their operational metrics. So that will help generate, in our estimate, improved sequential Q1 to Q2 for them.

Julio Romero, Analyst

Perfect. And just to clarify the improved sequential Q1 to Q2, that also includes the sales line as well?

Matthew Osberg, CFO

Yes. That's our expectation, yes.

Ty Silberhorn, CEO

Yes.

Julio Romero, Analyst

Okay, great. I wanted to ask about Project Fortify Phase 2. Based on my understanding from last quarter, I didn't think there were significant savings expected from Phase 2 in the early part of the year. I'm curious if that has changed or if you started to see some savings from Phase 2 in the May quarter.

Matthew Osberg, CFO

No. I think you've got it right. We saw, I'd say, a pretty minimal amount in Q1, and most of that is starting to get in place during Q2 and on the other side of Q2 is a lot of that has to do with the closure of our Canadian facility, which is happening in the later stage of Q2.

Julio Romero, Analyst

Great. And then last one for me is just a clarification question. Did you quantify the EPS impact from tariffs in Q1?

Matthew Osberg, CFO

We did. In Q1, we said it was $0.45 to $0.55. And we said a lot of that is first half-weighted. The team has done a great job. We had some favorability versus our estimate flow through in Q1 and a little bit more favorability that we think. So our new range is now $0.35 to $0.45. And that's just the team doing a lot of hard work to knock down some of those costs that we were anticipating at the beginning of the year.

Julio Romero, Analyst

Sorry, I'm a bit confused about that one part. So is it still somewhat expected in the second quarter perhaps in the full year guidance?

Matthew Osberg, CFO

Yes, yes. I mean the majority of that range is happening in the first half of the year, fairly equally weighted between Q1 and Q2.

Operator, Operator

Our next question comes from the line of Gowshi Sri from Singular Research.

Gowshi Sri, Analyst

Can you hear me?

Ty Silberhorn, CEO

Yes.

Matthew Osberg, CFO

Yes.

Gowshi Sri, Analyst

You lowered your EPS impact from the tariff to $0.35 to $0.40. Can you help me quantify how much of that reduction is due to the accelerated operational shift compared to factors like commodity price repricing or normalization?

Matthew Osberg, CFO

I'd say it's a bit of both. I think it's equally weighted maybe. You've got, I think, a number of things happening. The team is being more effective in how we're passing some of our operations through and trying to decrease the tariff impact. We are also looking at the input costs that we're getting. We're looking at how some of the costs that are coming in and flowing into some of our jobs. And so it's a bit of both. It's a bit of just, hey, we're able to not take those prices on, and we're able to be more efficient operationally and get through what we need to do better. So a little bit of both.

Gowshi Sri, Analyst

Okay. Got you. Is the Services backlog to a decline number to about 6 83, is that reflective of a general overall you guys selecting or rejecting lower-margin projects to preserve profitability amid these tariffs?

Ty Silberhorn, CEO

I would characterize it as a reflection of the current softness in the market. The Services team is focused on protecting margins, but as we've advised the team, as long as they remain within the 8% to 10% range, we are open to accepting some projects that may be slightly below that threshold. We're analyzing this on a full-year basis to ensure that the volumes are flowing as expected. The market is still experiencing fluctuations, and we've seen a couple of weak quarters in terms of awards. However, there remains the potential for a strong quarter with significant awards. As I've mentioned regarding Glass being more creative with varying job sizes, our Services team is also actively bidding on smaller projects that they wouldn't have considered eighteen to twenty-four months ago due to their size. They are confident in their capability to execute these projects thanks to the productivity improvements made in their facilities and their proven track record in the field during installations. This ability to adapt was part of the reasoning behind our difficult decision to close the Toronto facility to mitigate tariff impacts and consolidate operations into our two U.S. locations. Additionally, they are exploring jobs that utilize their engineering and installation services without the need for curtain wall fabrication, looking for new avenues to increase revenue while maintaining good margins and EBITDA contributions to the bottom line.

Gowshi Sri, Analyst

Okay. Amid this tariff impact, especially on Services, any commentary on the kind of success rate you guys are having with existing contracts? Are clients accepting the cost adjustment mid-project?

Ty Silberhorn, CEO

Yes. So the impact is really for the materials that were flowing out of Toronto and back into the Northeast United States. We really aren't able to pass those costs on. Those jobs were well in flight, well underway. Actually, part of our ability to shut that facility is those jobs were winding down and new jobs were starting up, and we started those new jobs in either Cincinnati or Dallas to support that work. So for Services, it's pretty difficult for them to get price adjustments. And that's why they're taking it on the chin here in Q1 and Q2 and really having to absorb the tariff impact and look at what else they can do productivity or anything they can do to drive some cost savings on materials as well.

Gowshi Sri, Analyst

Got you. And a final question on the M&A pipeline. Have you guys adjusted the multiples that you're targeting in this kind of environment?

Ty Silberhorn, CEO

I think many expected mergers and acquisitions to surge in the first half of the year. However, due to various macroeconomic factors, such as tariffs and sustained high interest rates, progress has been slow. We have remained focused on the strategic targets we've identified over the past two years and continue to pursue those opportunities. It's essential to have both a willing buyer and seller, and sellers seem more cautious about entering the market, wanting to ensure they can achieve good valuations. While we haven't noticed a decline in multiples for those assets that are being marketed or explored, valuations are trending towards reasonableness. Currently, strategic buyers have an advantage, particularly given the impact of interest rates and leveraged models, as private equity remains somewhat inactive. We're actively reviewing several appealing options in our portfolio and taking a more comprehensive view of the shifting tariff landscape and its implications for international markets. We maintain our stance on the target pipeline and are diligently working through it.

Operator, Operator

At this time, I would now like to turn the conference back over to Ty Silberhorn for closing remarks.

Ty Silberhorn, CEO

All right. Well, thanks, everyone, for joining the call today. We look forward to sharing our Q2 results in a few months, and I wish everyone a great weekend and a fantastic Fourth of July. Have a great day.

Operator, Operator

This concludes today's conference call. Thank you for participating. You may now disconnect.