Q3 2022 Apogee Enterprises Inc Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the Apogee Enterprises fiscal 2022 third quarter earnings Conference call.
At this time all participants are in a listen only mode.
After the speaker's presentation, there will be a question and answer session to ask a question. During this session you will need to press Star then one on your telephone.
If you require any further assistance. Please press star then zero.
I would now like to turn the conference over to your speaker for today.
Theyre pitching you may begin.
Thank you Linda good morning, and welcome to Apogee Enterprises fiscal 2022 third quarter earnings call with me today are tied silver Horn, Apogees, Chief Executive Officer, and Ashish <unk>, Chief Financial Officer, I'd like to remind everyone that there are slides to accompany todays remarks.
These are available in the Investor Relations section of Apogees website.
During this call we 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, we issued this morning.
Which is also available on our website.
Like to remind everyone that our call will contain forward looking statements.
These reflect management's expectations based on currently available information actual results may differ materially more information about factors that could affect apogees business and financial results can be found in today's press release and in our SEC filings.
And with that I'll call that I will turn the call over to Utah.
Thanks, Jeff and thanks, everyone for joining us this morning.
Today I'll share some highlights from the third quarter and provide an update on how we're executing our new strategy.
Following the comments Ashish will provide more details on the quarter and our full year outlook. Then of course, we'll be ready to take your questions.
Let's start with the third quarter highlights, which are on page four of our slide deck.
I'm proud of our team's efforts, which delivered a solid performance this quarter we.
We continued our positive momentum delivering margin expansion and adjusted earnings growth compared to last quarter.
Margins and adjusted earnings have now improved sequentially each of the past two quarters.
This was led by continued strong performance in architectural services.
Services revenue reached a record 92 million in the third quarter and continued to deliver strong profitability with 10% operating margin in the quarter.
In addition, we won several new project awards during the quarter.
<unk> to build our project pipeline for the coming years.
We are also seeing encouraging progress in our other segments.
Large scale optical continued its recovery with 8% year over year growth.
In framing systems, we achieved solid year over growth and margin expansion.
Through three quarters framing the adjusted margins have improved by 40 basis points compared to last year.
We've reached these gains even as we continue to face significant supply chain and inflation headwinds.
The pricing actions, we've taken in response to inflation are beginning to offset some of those higher costs.
We are also realizing the benefits from our restructuring actions and our relaunch of lean to drive plant productivity.
We expect framing will make further margin progress during the fourth quarter.
Architectural glass had adjusted operating margin of 3%.
Now this is still a long way from what we believe the glass segment can deliver but it was meaningful progress compared to the second quarter and we saw solid productivity gains materialize in the final month of the quarter.
Turning to cash flow and the balance sheet, our financial position remains very strong.
We had $28 million of free cash flow in the quarter.
Year to date, we have now generated $73 million of free cash flow, which is more than 180% of adjusted net income.
With this strong cash flow, we continued to return capital to shareholders and we improved our already healthy financial position.
We achieved these results in what is still a challenging operating environment.
Covid continues to impact our broader markets and like many companies inflation remains a significant challenge.
We have seen meaningful cost increases for freight aluminum glass paint and other materials used in our operations.
We also continue to experience challenges in our supply chain and in some cases these disruptions have impacted our service to customers.
Throughout the year, we have taken actions to mitigate inflation and the supply chain issues.
These actions are beginning to have a positive impact on our results.
We continue to focus on improving execution.
We're closely managing our controllable costs, we've adjusted our pricing where appropriate.
And we're working to pull forward the benefits from our restructuring actions as quickly as possible.
We expect to make further incremental progress in the fourth quarter.
This gives us the confidence to narrow our full year earnings guidance to the higher end of our previous range.
Just three weeks ago, we hosted our Investor day, and I would like to thank everyone, who attended either in person or virtually.
During that Investor day, we outlined our new enterprise strategy to deliver profitable growth and improved return on invested capital.
As highlighted in slide five of today's deck, our strategy has three pillars.
First.
We are working to become the economic leader in our target markets with clear go to market strategies did.
Differentiated offerings and competitive cost structures to enable us to be a top margin generator in our target markets.
Second.
We will actively manage our portfolio to drive higher margin and ROIC performance.
We will accomplish this by scaling and expanding our top performing businesses.
Actively addressing underperformers.
And investing to add new differentiated offerings to drive growth.
And third.
We will strengthen core capabilities and platforms.
The foundation of which is building an operating model that will deliver greater efficiencies.
More scalability.
And enable sustained profitable growth.
During the third quarter, we made progress in each of these three pillars.
We continue to execute the restructuring and cost actions, we announced in August.
The realignment of framing systems is nearly complete moving from what had been six decentralized business units to a more integrated business that better leverages the scale and capabilities of the combined organization.
These changes are bringing more clarity to our go to market approach and are also enabling improved execution reduce costs, which in turn will generate higher margins.
We are also making progress in architectural glass.
At the end of the quarter, we completed the sale of our facility in Statesboro, Georgia.
We also wrapped up operations at our Dallas location.
All production has been successfully transitioned to our flagship glass facility in Minnesota.
We did all of this while maintaining high levels of service and delivery for our customers.
These actions position us to pursue our strategy of focusing on premium offerings for glass, where we can differentiate and deliver more value for customers.
We are also accelerating improvements in glass segments cost structure and driving productivity to improve margins.
We're on track to transition our soda wall business from framing systems to the services segment.
We expect this will be completed early next fiscal year and this move will unify our offerings for complex curtain wall projects and will enable improved operational performance for soda law.
We're moving forward with our enterprise transformation efforts. So we have several projects underway to strengthened core processes and systems.
This will provide new digital and back office capabilities across several functional areas, allowing us to support the businesses more efficiently.
We are beginning to deploy elements of these new systems now and we expect to make further progress in the coming quarters.
Finally, we took important steps to reinvigorate, our lean and continuous improvement program.
We added a new leader to head those lean efforts with an initial focus on architectural glass, where we are seeing promising early results.
In the coming quarters, we will expand our lean toolkit to other parts of the business with our ultimate goal of embedding lean into the culture of how we work.
And further develop our talent.
We are still in the early stages of executing our new strategy.
And over the next several quarters, we will continue our strategic pivot positioning apogee to create peak value for all stakeholders driving toward our long term financial goals.
I am excited about the path, we see ahead for apogee and I am confident we can achieve the goals that we've set for ourselves with that let me turn it over to new sheet to provide more details on the quarter and our outlook.
Thank you Todd and good morning, everyone.
This was a positive quarter for apogee on several fronts.
Sustained the momentum in our business we.
We continue to generate strong cash flow and we made further progress on our enterprise transformation.
Let me provide some more details on the quarter.
Starting with consolidated results on page six of our earnings presentation.
Total revenue grew 7%.
This was led by growth in architectural services and framing systems.
Large scale optical also posted solid growth.
As expected volumes were lower in architectural glass, reflecting the lower order volume in that segment over the past year.
The quarter included $3 4 million.
Pretax restructuring costs.
These are related to the actions we announced in August.
The restructuring costs reduced our reported gross margin in the quarter by approximately 100 basis points.
Year to date, we are in good $24 2 million.
Restructuring costs.
This $7 $5 million have been cash expenses and the remainder were noncash charges.
We anticipate another $2 million to $3 million of costs in the fourth quarter.
We are pleased with how our teams have executed the restructuring <unk>.
Structuring costs are tracking below our initial estimate and we're accelerating some of the cost savings.
We remain on track to be complete with our restructuring in the first quarter of fiscal 2023.
Excluding the restructuring costs adjusted operating income was $41 $1 million.
This was down from.
$31 8 million in last year's third quarter.
As a reminder, last year's third quarter included $7 $4 million of upside related to a new market tax credit in the glass segment.
Also the temporary cost actions, we took in response to Covid.
Another $7 million of operating income in last year's third quarter.
Inflation also continues to be a significant headwind in the quarter.
The gross impact of inflation in the third quarter was $21 million.
We've been able to answer it 12 million of this through pricing actions, but in net inflation impact of $9 million.
Fiscal year to date, the net impact of inflation has been $29 million.
We expect inflation pressures will persist in the fourth quarter and into next fiscal year.
However, as we move forward, we expect our pricing and cost actions will offset a large portion of inflation headwinds.
Between the new market tax credit reversal of temporary cost actions and inflation, we faced over $23 million.
Year over year headwind in this quarter.
We were able to answer it over 12 million of this through benefits of our restructuring cost sanctions of procurement savings and an improved sales mix.
As a move into the fourth quarter and next year I am confident we will continue to drive incremental margin gains.
Let me shift to the nonoperating items on the income statement.
Net interest expense was down $1 million driven by lower debt balances.
The quarter included $3 million pretax impairment charge.
This was related to a minority investment in a glass technology company.
This write off represents the entire value of <unk> investment in this company.
Our tax rate was 21, 7% compared to $23 five in last year's third quarter.
Over the long term, we expect an average tax rate of approximately 24, 5%.
But this can vary from quarter to quarter.
Finally, a share count continues to trend lower due to stock.
Stock repurchases.
What are you start together, we reported GAAP net income of 44 per share.
Excluding the restructuring and impairment costs.
Adjusted earnings came in at 63 cents per diluted share.
While earnings were lower year over year. This was a nice sequential improvement with <unk> <unk> per share in the second quarter.
Let's turn to segment results, which are on slide seven.
Starting with architectural framing systems.
Framing revenue grew 11% compared to last year. This was primarily driven by pricing actions, we've taken to offset inflation.
Operating margin was 7%.
That is a 170 basis point improvement compared to last year. The margin gains were driven by improved pricing and benefits from our restructuring and cost actions, which offset the impact of inflation.
Moving to architectural glass.
Revenue was down 12% as expected this was primarily driven by lower volumes.
It had fewer new projects awards in the last year, while non residential construction has been in a downturn.
We had also strategy.
Shifting away from some lower margin sales.
The lower volume was partially offset by a more favorable mix.
Glass reserves included $3 $5 million of restructuring costs.
Excluding the restructuring costs adjusted operating income was 3%.
As mentioned earlier last year's quarter included $7 4 million of operating income related to new market tax credit.
Glass margins improved sequentially compared to four 5% in the second quarter.
We are beginning to achieve cost savings from restructuring as well as productivity gains from our lean program.
Margins also benefited from an improved sales mix.
In architectural services revenue grew 20% to $92 million.
This was a new record for the segment.
Operating margin was strong at 10%.
Services continue to have solid project execution.
However margins were lower than last year due to a less favorable project mix.
We're also encouraged by the strong order flow in architectural services.
Net order flow has increased each of the past four quarters and backlog has steadily at $572 million.
Turning to large scale optical revenue of $27 million grew 8% compared to last year's third quarter.
This was primarily driven by more favorable sales mix.
Lso margins were solid at 21, 9%.
Margins were lower than last year's third quarter, driven by one time costs from expedited freight, which offset the benefit from improved sales mix.
Finally, our corporate cost increased this quarter to $6 $9 million.
This was driven by increased healthcare cost.
Turning to page eight our cash flow and balance sheet remains strong.
Cash flow from operations.
In the quarter was $31 million.
This brings year to date cash flow from operations to $86 million.
We are on pace to have another very strong year of cash generation cash.
Cash flow is lower than last year, which was a record year for cash flow.
Year to date Capex was $30 million is below last year's level.
We slowed some investment as we completed our enterprise strategy work earlier this year.
Based on year to date spending we now expect full year capex of approximately $25 million.
This is down from our previous estimate of approximately $35 million.
Now that we've completed our strategy work, we expect Capex will ramp up in the coming quarters as we invest in high return projects to advance our strategy.
We continue to return cash to shareholders.
Year to date.
$44 million from share buybacks and dividends.
Our buybacks have reduced our outstanding share count by 3% compared to last year.
Our balance sheet remains very strong.
Net debt is down to $85 million.
We have no significant debt maturities until June of 2024, and we had no borrowings on our $235 million.
Revolving credit facility.
This strong financial position provides significant flexibility as we begin to execute our new strategy.
Now turning to our outlook for the rest of fiscal 2022, which is on page nine of our presentation.
As Todd mentioned, we are narrowing our full year guidance. We now expect full year adjusted earnings would be 25 to $40 per share.
As a reminder, this guidance excludes the impact of restructuring and impairment costs.
We expect cost inflation and supply chain challenges will continue in the fourth quarter.
We are working to mitigate these headwinds by adjusting pricing to offset inflation continuing to focus on execution closely managing controllable costs and working to accelerate the benefits from our restructuring.
These actions should drive further sequential progress in the fourth quarter, which gives us confidence in our full year outlook.
In the fourth quarter, we also expect to realize a pretax gain of approximately $19 million related to sale of architectural glass facility in Statesboro, Georgia.
We intend to exclude this gain from our adjusted results.
I would like to wrap up by acknowledging our teams' efforts. This quarter, we have made great progress on restructuring actions, we announced in August.
And we have continued to build momentum in creating and backbone of core capabilities and platforms.
Apogees transformation is well underway and our teams are working hard to make apogee a top performing company.
With that I'll turn it back over to Tyler for some concluding remarks.
Thanks Ashish.
To summarize we are very encouraged by the progress this quarter.
Our entire team is focused on executing our new strategy.
Despite some significant near term headwinds. The work we are doing is beginning to show in our financial results.
We sustained our momentum delivering another quarter of sequential earnings growth.
Our restructuring plans are progressing ahead of schedule, allowing us to accelerate those cost benefits.
The pricing adjustments, we made in response to inflation combined with our cost actions are beginning to offset the impact of those higher costs.
And I'm, particularly pleased by the early progress we've made with Relaunching, our lean and continuous improvement program.
We expect to make further gains in the fourth quarter as we continue to execute our strategic pivot and.
I am confident that the actions we are taking now will position apogee for sustained profitable growth in the coming years.
With that.
We are ready to take your questions.
Thank you.
Ladies and gentlemen, as a reminder to ask a question you will need to press Star then one on your telephone.
Or withdraw your question.
Thank you again.
Wanted to ask a question.
Please standby, while we compile the Q&A roster.
Our first question comes from the line of Chris Moore with CJS Securities. Your line is open.
Hey, good morning, guys. Thanks for taking a couple of questions.
Hi, Good morning, Greg Good morning, Yes interesting inflation discussion I appreciate that detail.
You talked about framing revenue added by kind of the flow through pricing actions to offset some of the inflation. So.
First of all is that both the quick and the and the long lead time.
The pricing is being.
Increased.
Yes. It is.
Chris as we look at that the moves that the framing team has been making the last couple of quarters.
Part of the challenge we've had in kind of catching up to those inflationary pressures was due to some of the longer lead time items in that business.
And some of the shorter term items, they are able to get some of that pricing through but we're seeing that they've made progress each month of the quarter. They started to close those gaps.
Yeah.
Got it so just so I understand the mechanics when you.
Sign a contract on the long lead time stuff do you do you pre buy the aluminum at that point in time or how does that work.
So if you think about our architectural services business, we have enough lead time for us to be buying in advance it's been hedging on aluminium and commodity like those for shorter lead times, which are like six months three months in the framing segment the opportunity for locking in pricing.
It is limited.
Team and procurement is doing is they're really going back to the windows as soon as didn't know about the orders and locking into supply chain and volumes, we need right now for US. The challenge is really to get the volumes in place more than pricing, sometimes so I would say framing segment less unlocking in pricing.
Services segment more working towards locking in pricing for long term contracts.
Got it that's helpful.
And.
When you look at pricing overall is it the framing that is.
The biggest issue is still moving forward and try in terms of that catch up.
Yes, framing and because of the short cycle time, they have had by far the biggest headwinds on material cost inflation. So they've had the most work to do and they have a mix right. They do have some stuff that is kind of medium term and a little bit of longer term. So that's where we've seen the bulk of the headwind is.
Also where we've seen the bulk of the price realization as you might expect as they are trying to close that gap. So.
The driver for top line as <unk> commented on was in fact pricing. If we if we look at volumes volumes were still down slightly which.
Is what we expected given where the market as we see it as just bottoming. So what has been driving that top line revenue number for framing. The last couple of quarters is really around the price actions.
Got it.
And my next one you really.
Probably back more towards some of the Investor day stuff that we talked about so.
The target operating margin is 10% plus by fiscal 'twenty five.
Im just trying to understand better how you view is that is that a mid cycle target or kind of.
In the past.
Talked about that 1000 basis point increased trough to trough.
This 10% plus.
Yes.
Is that mid cycle or maybe you can just help me understand a little bit better on that.
Yes, I would say, Chris as we looked at that we're kind of putting that is a minimum that we want to achieve now if there's a significant downturn like we saw with when the pandemic started nearly two years ago.
We wanted to be in a better position that we don't see as big a drop in our margins, but that's something that might pull us down below that 10%. But then also in a very strong cycle. We would expect that we will be achieving comfortably above that 10%.
Got it that's helpful.
Jump back in line I appreciate it guys.
Thank you thanks, Chris.
Thank you.
Our next question comes from the line of Eric Stine with Craig Hallum. Your line is open.
Good morning, everyone.
Good morning.
Hey.
Maybe just to follow up on that last question.
And I do appreciate you quantifying the impact on the materials cost side for the year, but also <unk> is it fair to say, though I mean, it seems like you feel that.
Potentially the worst of it happened in the third quarter now maybe that is not the case, but I'd love your thoughts given all of the steps Youre, taking how long you think until you kind of get ahead of us.
Yes. So if you think about the inflation and net inflation, we saw the quarter to being one of the highest of the three quarters.
And as we move into quarter three we are already seeing an improvement on net inflation and as we had indicated in our quarter. Two earnings released by end of Q4, we will have enough price increase to offset inflation.
We close enough to the gross inflation.
Got it.
Okay. That's helpful maybe.
Maybe just turning to to framing.
If I'm not mistaken I think you had the highest orders there.
Since before Covid and I know some of that might be prices.
But just curious your thoughts on that I mean do you think this is the start of some of the operational steps, you're taking there and would love to get your thoughts on whether you think that's sustainable.
Yes, we look at framing so just as I answered earlier for Chris We look at volumes will take price effect out on top line volume was still negative.
But improving sequentially as we went quarter to quarter that ties out with what we talked about at Investor Day is we do see the market as kind of bottoming at this point.
We know there's still a lot of puts and takes and questions with omicron variant now for Covid et cetera, but we're still looking at a positive growth in the market as we step into our fiscal 'twenty three or <unk>, the bulk of calendar 'twenty two.
The actions they've taken on price as well as cost so they've been working on cost obviously from a restructuring side.
They have started reinvigorating their lean activities. So we think both of those even absent of meaningful volume growth. They still have the potential to continue to on that margin improvement path.
Got it.
So maybe last one for me obviously the Abi the.
The trend has been quite good few days ago.
Commentary was a bit cautious.
Talking about the potentially you know it was a rebound from COVID-19 and that that rebound is coming to an end this cycle, which was kind of interesting commentary given the trends in the market clearly it sounds like you think that it is.
Things have bottomed. So just curious if you could kind of.
Bridge to your view in that view that I just referenced.
Sure and I think if we looked at those numbers the Abi in a couple of others that ticked down a bit in November they were still in the expansionary area.
It's how we looked at those numbers and I think we see it more indicative of that theres going to be some bumps as we go through this recovery.
But still we look at right now everything points to where kind of bottoming at this stage and when we look at activity.
We're pointing towards a volume growth as we go into our fiscal 'twenty three.
Nothing has changed with that we could see some lumpiness quarter to quarter across all of those metrics, but that's how we're viewing the market right now.
Got it thanks a lot.
Alright, Thanks, Eric.
Thank you.
Next question comes from the line of Julio Romero with Sidoti <unk> Company. Your line is open.
Hey, good morning, Todd and Ashish, Thanks for taking the questions. Good.
Good morning Julio.
Can you talk about the.
The Capex ramp you referenced that you use.
Expect in the out quarters of fiscal 'twenty, three and beyond.
What type of high return projects.
Would they be focused on the you talked about your Investor day about allocating more resources to services and lso.
Those would be the segments that you are.
Capex will be focused on.
So as you've seen in the last two is Hulu we have.
In fiscal 'twenty, one because of Covid, we had good data to Capex and there were certain investments we had to do that we had to curtail given the environment and pandemic.
In fiscal 'twenty, two we limited our Capex as we were working on a strategy to understand where exactly we should be investing so those are two years, where the business has not invested beyond the maintenance capital. So to speak. So now is the time, we now have a strategy clear and we would like to invest and go back to that 25%.
$35 million range as a normal capex of this company over the coming years.
When you think about the segments.
Each of the segments have opportunities and strategy growth ideas that they will be investing capex on.
I would say services.
As you asked the question services may not have the highest of those capex investments, but I'll just say all of other segments have good opportunities to invest in capex.
Yeah, and I would add to that Julio.
Tying back to Investor Day, and services is generally a low capital invested business.
Our lso business continues to see strong growth they've actually seen some positive shifts in buying behavior.
As well as they talked about the need to expand and diversify that business. So those are areas, we would be looking at potential capital investments for them.
Within framing our storefront and finishing business is a good performing business theres likely some capital needs that would allow them to expand as the markets recover so that they can fuel some profitable growth for us that would be accretive to the company and then when we look at glass in the window and wall.
Portion of framing our capital there is really going to still be focused on short term quick payback really still helping them drive margin improvement do we get comfortable that we are at a sustainable margin level that we need those businesses to perform before we would invest any meaningful capital to add capacity, Eric or buy.
<unk> capability.
Okay. That's really helpful. I appreciate the run down by segment there.
And I guess.
On Lso can.
Can you maybe talk about some of the short term freight costs you saw in the quarter and if those are expected to kind of persist into the fourth quarter and then secondly, how do you view.
Like fourth quarter, you usually have a typically strong margin.
Yeah.
And in Lso, So how do you view kind of fourth quarter lso margins shape up.
Yes, I would say that the third Florida expedited freight costs in Lso segment was a one off there has been significant demand in the marketplace given the holiday season, and we wanted to make sure we seized the opportunity will be good.
I would not expect that expedited shipment freight costs to continue in Q4.
What was the second part of the question Julio can repeat the second question Shneur.
Yes, typically you have a strong fourth quarter margin in lso in gist.
Wanted to get your view on how you how you view that shaping up.
Yes, I would say lso margin in fourth quarter are going to be consistent with prior year quarters.
We are mid Twenty's is what we look at and Lso and there will be back at that level.
Okay I'll pass it on thanks very much.
Thank you.
Thank you.
A reminder, ladies and gentlemen that star one to ask a question.
Our next question comes from a line of field Zelem with Titan capital. Your line is open.
Thank you I'd like to circle back to the lean initiative and since glass is the is the first segment to.
To restart the lean initiative are you anticipating that they will also be the first two.
Complete their restructuring process or do you simply have more to do and it will take longer.
Well both framing in glass the bulk of the restructuring efforts really have have come through at this point there is still a little bit to do in Q4 as <unk> commented on so getting those costs behind us as we close out the year.
I think both framing and glass will have that in place where the lean efforts have focused in on glass, we just prioritize rather than trying to do a little bit of everything everywhere. We really wanted to focus and we saw the margin improvement opportunity that we had in glass and the fact that we wanted to consolidate that footprint so that we.
Really focused on more of the mid sized projects and kind of the premium market side of that business.
It's where we wanted to focus our initial efforts there and really drive it on productivity on the production floor. So that work is flowing through.
Actually as I commented, we saw very strong last month of the quarter from glass or some of those productivity improvements started to take hold and we expect we'll see that build in the fourth quarter and then as we go into the first quarter of next year from a margin perspective on glass.
Thank you.
Thank you.
I'm showing no further questions in the queue I will now turn the call back over to sites.
Silberman for closing remark.
Alright, well. Thank you thanks for joining us today and as we talked about we remain focused on executing the new strategy to create peak value for all of our stakeholders I'm, hoping all of you all have a safe healthy wonderful happy holidays, and a joyful new year, Thanks and have a great rest of your.
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Ladies and gentlemen, this concludes today's conference call. Thank you for your participation you may now disconnect.
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