APOGEE ENTERPRISES, INC. Q3 FY2025 earnings call

Management Statement and Operational Highlights

• Acquisition: Closed acquisition of UW Solutions, with the team executing integration plan and early progress encouraging. Actively cultivating M&A pipeline for accretive opportunities.
• Market Conditions: Non-residential construction remains challenging with softness in framing and glass segments, but ABI improved recently. Interest rate-sensitive sectors weaker, while education, healthcare, and transportation show growth. Architectural segments shifting mix to high-growth verticals, with institutional projects now largest share of backlog.
• Services Performance: Services year-to-date adjusted operating margin at 7%, within target range of 7%-9%. Backlog for services is $742 million, though declining trend reflects market softness.
• Strategy: Focus on outperforming industry, leveraging UW Solutions capabilities, diversifying sales mix, and developing next strategic plan for fiscal 2026 with emphasis on growth and margin expansion.

Segment Performance

• Framing: Net sales declined approximately 1% to $138 million, with adjusted operating margin at 9.8% due to a less favorable product mix and higher costs for freight and compensation.
• Glass: Net sales declined this quarter due to soft end market demand impacting volume, and adjusted margin was affected by lower volume levels.
• Services: Delivered third straight quarter of double-digit net sales growth (11%), with adjusted operating margin improving to 8.6%. Services backlog ended the quarter at $742 million, down from previous quarters but still healthy with nearly two years of sales in backlog.
• LSO: Sales grew 28% to $33.2 million, primarily from UW Solutions acquisition, but organic net sales declined 6% due to lower volumes in the retail channel. Adjusted operating margin declined to 18.6% due to lower volume in legacy LSO and dilutive margin impact from UW Solutions.

Guidance

• Full-Year: Expect net sales to decline ~5% including UW Solutions acquisition impact and lower Q4 volume in framing and glass. Full-year consolidated adjusted operating margin ~11%, adjusted EPS at bottom of $4.90-$5.20 range. Adjusted operating margin expected to decline sequentially in Q4 due to volume and pricing pressure in glass and framing.
• Fiscal 2026: UW Solutions expected to contribute ~$100 million in net sales with adjusted EBITDA margin ~20% and be accretive to EPS. Segments expected to be within target adjusted operating margin ranges, but glass margins to moderate from high teens to 10%-15% range. Potential headwinds in fiscal 2026 from lower insurance and incentive costs.

Risks

• Market Softness: Continued pressure from soft end market demand in non-residential construction, particularly impacting framing and glass segments.
• Interest Rates/Policy: Uncertainty from interest rate-sensitive sectors and potential policy changes from incoming administration affecting non-residential new construction.
• Margin Moderation: Glass margins expected to moderate in fiscal 2026, and potential headwinds in fiscal 2026 from lower insurance and incentive costs.

Question and Answer

Q: Good morning, guys, and happy New Year. Can we maybe start with the glass segment a little bit and talk a little bit about the end market weakness you are seeing there? You know, how are price and mix holding up in the segment? Then secondly, how much lower should we be modeling Q4 sales dollars in glass relative to Q3?

A: Yeah. Good question, Julio. So I think what you are seeing right now, especially in Q3 in glass, is more pressure on volume. The price is still kind of holding up. But my expectation is, you know, price will continue to be under pressure as volume pressure continues, and, you know, we do expect volume to continue to be under pressure in Q4 as we kind of laid out today. You know, in terms of how to think about it, I mean, yeah, you know, we talked about volumes coming down Q4 primarily in framing and glass. Most of that, you know, is in framing, but there is some in glass that is going to be due to pressure on price and volume. And, you know, I think just from a run rate perspective, you know, I think it is something in the ballpark of around Q3. You know, maybe a little bit above, maybe a little bit below depending on how things shake out. But Q3 is probably a good benchmark for Q4.

Q: Hey. Good morning, guys, and happy New Year. Good morning, Julio. Hey, Julio. Can we maybe start with the glass segment a little bit and talk a little bit about the end market weakness you are seeing there? You know, how are price and mix holding up in the segment? Then secondly, how much lower should we be modeling Q4 sales dollars in glass relative to Q3?

A: Yeah. Good question, Julio. So I think what you are seeing right now, especially in Q3 in glass, is more pressure on volume. The price is still kind of holding up. But my expectation is, you know, price will continue to be under pressure as volume pressure continues, and, you know, we do expect volume to continue to be under pressure in Q4 as we kind of laid out today. You know, in terms of how to think about it, I mean, yeah, you know, we talked about volumes coming down Q4 primarily in framing and glass. Most of that, you know, is in framing, but there is some in glass that is going to be due to pressure on price and volume. And, you know, I think just from a run rate perspective, you know, I think it is something in the ballpark of around Q3. You know, maybe a little bit above, maybe a little bit below depending on how things shake out. But Q3 is probably a good benchmark for Q4.

Q: Hi. Thanks. Good morning, guys. Excuse me. Sorry. Just on Ty, you alluded to some of the forecasts out there by third parties. Just in terms of the market, but your, you know, your services business, I think, you know, is one of those areas in the company that, you know, gives you, it has longer lead times, gives you some visibility. Are the trends that you are seeing in terms of sort of bookings or quotes, you know, any other KPIs within that business sort of aligning with what some of the third-party forecasts suggest about the market? Are they worse? Are they better? Just be kind of curious what you are seeing in terms of underlying demand trends in that business A: Yeah. They would say it is aligning. You know, we are not guiding yet for next year, but I think as we look at their backlog and how fiscal 2026 is shaping up, they are probably going to demonstrate that they will outperform the market a little bit. You know, even if they, let us say, were flat year over year, we would see that as a win with everything else we are seeing in kind of the core project types. And that is a little bit of the flight to quality. We are certainly seeing that as the markets have tightened up. They are getting looks and even second looks on some projects. As a result of that, it does put a little pressure on their margin because as projects, you know, fewer projects, there are more people chasing fewer pieces of the pie. So there is a little bit of pressure there, but they have been executing on the productivity side that got them back into that 7 to 9, and we expect they will be operating within that 7 to 9% target range. But overall, they would also say yes. There is definitely softness in the market. Some choppiness again with projects looking like they are ready to go and then getting held before they give a firm yes on an award. So they are seeing a bit of that choppiness

Q: Good morning, everyone. Well, I did that yesterday. I am done for the year, hopefully. Hi, Matt. And, Matt, you spoke a little bit about the industrial flooring market for UW. And I guess when you speak to the group there and you think about it, what kind of sensitivity might that end market have to higher interest rates and maybe a slower economy or maybe some of the administration transition? Is there any concern that that market could weaken a little bit?

A: I think when we see that, remember this flooring is really driven not only by putting mezzanine floors in existing facilities. We do have some work that gets specked in for on first-floor build-out, it is the robotics component. So there is a benefit there that, frankly, even with tight labor, etcetera, that creates an opportunity where people are looking to put robotics into their facilities to address some of the labor challenges or labor cost issues. It is also nice because it is about 80% R&R. So it is a retrofit of an existing facility. It is not relying on new plant or new warehouse build-out. Obviously, if consumer spending is picking up and so the Walmarts, the Amazons, etcetera, see growth and want to continue to add to, you know, existing or build new facilities, that is a plus. But otherwise, you know, I think that business for the next few years is relatively insulated from that. You know, yes, there could be years where they get a couple of huge wins across a couple of sites. They give them a big lift. But we like that business a lot. We are investing in that. We are going to continue to look at other areas we can add into the portfolio that gives us that type of exposure

Q: Good morning, guys. Good morning. Just with the EPS guidance, what are the key factors that could potentially drive the performance towards the upper end of that range in Q4? In terms of the UWS progress, can you give me a little more color on what synergies you are expecting? And I think you had, like, a target of $100 million contribution for FY26. Any update on that? In terms of the market conditions and the changes for your long-term operating margins, I am sorry. I might have missed this, but any particular number for the architectural framing that you are putting out on our page?

A: Yeah. So for FY26, we are still projecting that we are going to have $100 million contribution from UW Solutions at about a 20% adjusted EBITDA margin, and we do expect that to be accretive to EPS next year. And we do have outlined that we are trying to achieve $5 million in synergy targets as we move through the next, you know, 12 to 18 months as we look at bringing in the business. We have already started to realize some, but we are, you know, working through the integration process here. And I would say we are on track. It is where we expected to be. So framing, you know, for this year, we expect framing to be within its, you know, 10% to 15% range. And next year, we see opportunity for them to be in their long-term range as well in fiscal 2026. Yeah. So Gowshi, this is Matt. You know, as we tried to be, you know, pretty thoughtful in directing people towards the bottom of that range for the year, which obviously all that plays out in Q4. And I think the big driver we are seeing there is just more pressure on volume than we expect. And so I think as we look at Q4, volume is probably our biggest variable that drives that. What we are seeing now would put us towards the bottom of that $4.90 to $5.20 range.