Q2 2024 Apogee Enterprises Inc. Earnings Call
Hello, and welcome to Applegy Enterprises Inc Q2 2024 Earnings Conference Call.
At this time, all participants are on a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask the question during this session, you will need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised.
To withdraw your question, please press star 11 again. I would now like to hand the conference over to Jeff Hebshon so you may begin.
Thank you, Tawanda. Good morning and welcome to Apogee Enterprises' Fiscal 2024 Second Quarter Earnings Call. With me today are Ty Silberhorn, Apogee's Chief Executive Officer, and Matt Osberg, Chief Financial Officer.
I'd like to remind everyone that there are slides to accompany today's remarks. These are available in the Investor Relations section of Apogee's website.
During this call, we will reference certain non-GAAP financial measures. Definitions of these measures and reconciliation to the nearest GAAP measures are provided in the earnings release and slide deck we issued this morning.
I'd also 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 Apogee's business and financial results can be found in today's press release and in our SEC filings. And with that, I'll turn the call over to you, Ty. Thank you, Jeff. Good morning, everyone, and thanks for joining us.
Apogee has delivered another terrific quarter as we continue to advance our strategy.
Let me touch on some highlights from the quarter and connect those to how our strategy continues to drive sustainable improvements in our business.
Then I'll turn it over to Matt for more details on the quarter and our outlook.
Let's start with the highlights, which are on page 4 in our presentation.
Overall, this was another strong quarter that continued the positive momentum we've established the past two years.
We are especially pleased to report an operating margin that exceeded our 10% target for the first time since we established our financial goals in late 2021.
This margin expansion drove adjusted earnings per share to a new quarterly record.
I'm proud of our team for the work they've done to achieve these milestones.
Just as importantly, we've demonstrated that we can meaningfully grow profit dollars and cash flow even in an environment without meaningful volume growth.
Once again, architectural glass led the way, continuing their revenue and profit growth trend.
As a reminder, when we began our strategic transformation two years ago, the glass segment had operating margins in the low single digits.
We've now achieved eight consecutive quarters of sequential margin improvement.
I'd like to recognize the entire GLASS team for this tremendous success.
Our improved results are being driven by our three-pillar strategy, which is highlighted on page five in our presentation.
We've made great progress toward becoming an economic leader.
We better to find our target markets
We're focused on differentiated products and services.
We've built more competitive cost structures.
And we've made great strides to improve operational execution.
In our second pillar, actively managing the portfolio, we've taken steps to shift our portfolio to higher margin offerings, which drive improved ROIC performance. We're making investments to scale and grow our top performing businesses. We've implemented focused improvement plans to strengthen underperformers, and we are increasing the mix of differentiated offerings across our portfolio.
Finally, we are strengthening our core capabilities. The foundation of this is deploying the Apigee management system.
which is our approach to lean and continuous improvement.
We are also continuing our shift from a decentralized operating model to one with center-led functional expertise that better supports the needs of our business.
And we are improving our approach to talent management and talent development at all levels of the organization.
As we move forward, we see significant opportunities to continue to build on this success.
When we announced our new financial goals in 2021, we had operating margins in the low to mid-single digits, and we were not earning our cost of capital.
As we began to execute our strategy, improving margins and ROIC was the primary focus.
Especially in glass and framing systems, which were underperforming their potential.
In several cases, we made the strategic decision to move away from lower margin sales where we did not have differentiated offerings.
Now that we have substantially improved our margins and are earning above our cost of capital, it is appropriate to shift more focus to driving profitable revenue growth. We are making strategic investments that will enable organic growth. We are leveraging our improved execution and service levels to gain market share. We are working to further diversify our project mix in the higher growth sectors. And we continue to explore potential acquisition opportunities that support our strategy, accelerate our growth, and our diversification. These efforts will create opportunities across the enterprise to drive above-market growth in the years ahead.
We will do this while sustaining the things that have made us successful these past two years. Staying focused on driving productivity and execution, carefully managing our cost structure ... End
and further strengthening our results-driven culture. With that, let me turn it over to Matt.
Thanks, Ty, and good morning, everyone.
First, I'll begin with an overview of our second quarter results and then turn to our updated outlook for the full fiscal year. As we look at our second quarter results, despite revenue declining 5%, it was another strong earnings quarter. Adjusted diluted EPS grew 28% to a record level of $1.36. We also expanded operating margin by 290 basis points to 11.5%. Consolidated revenue was $354 million for the quarter compared to $372 million last year, primarily reflecting lower volumes in services and framing.
This was partially offset by strong growth in glass, which was up 22%. The growth in glass was driven by improved volume, pricing, and mix, reflecting our continued strategic shift towards higher value premium products.
In our services segment, revenue recognition is mainly a function of the stage projects are in and how much work has been completed.
Compared to the second quarter of last year, in the current year, we had a higher mix of products that are early in their life cycle, which drove lower levels of revenue being recognized in the current quarter. The revenue decline in framing was primarily driven by lower volumes, reflecting elevated volumes in the prior year as we worked to reduce lead times to drive a reduction in backlog. This was partially offset by a more favorable product mix. Consolidated operating income increased 26%, and operating margin expanded 290 basis points to 11.5%, primarily driven by strong sales and margin improvement in glass. Segment operating income for glass nearly tripled to $17.4 million, up from $6.5 million last year. The glass segment operating margin improved to 18.5%, over a 10 percentage point increase compared to last year, and reflects favorable operating leverage and benefits from pricing and mix. Framing grew segment operating income 3% and expanded segment operating margin by 140 basis points to 13.3%, driven primarily by improved mix and cost efficiencies.
partially offset by the impact of lower volume. Both services and large-scale optical segment operating margins were down primarily due to the impact of lower volume. However, services improved margins sequentially from the first quarter, and we expect services margin to continue to improve in the second half of the year. Corporate expenses of $6.1 million were in line with prior year, however, were less than the first quarter of fiscal 24, primarily due to lower insurance-related costs. While our corporate costs can have variability from quarter to quarter, we expect the run rate for the third and fourth quarters to trend more closely with the levels experienced in the first quarter.
This quarter, we recognized a $4.7 million pre-tax benefit from a New Markets Tax Credit, which was recorded in other income. The New Markets Tax Credit is a federal program that encourages investments in local communities.
The credit we realized this quarter was related to investments we made seven years ago.
We have we have two similar tax credits pending which we expect to recognize in fiscal year 26
Our tax rate in the quarter was 22.9%, below our long-term rate assumption of 24.5% due to the favorable impact of discrete tax items.
Adjusted EPS grew 28% to $1.36.
primarily driven by higher operating income.
EPS was also benefited by a lower diluted share count, which reflects our share repurchase activity over the past two quarters.
Looking at backlog trends for the quarter on a sequential basis,
Fact log for framing was $197 million compared to $221 million in the first quarter.
The reduction was driven primarily by a decline in our longer cycle business, reflecting delays in award activity and continued strategic shift towards projects that allowed for more attractive margins.
Services finished the quarter with $674 million in backlog compared to $709 million last quarter.
primarily reflecting delays in award activity.
We had another strong quarter of cash flow as we generated $41.3 million of cash from operations.
an improvement of $13.5 million over last year.
This brings year-to-date operating cash flows to $62.6 million, an improvement of $65.2 million compared to the first half of last year. This was primarily driven by improved working capital, as the first half of last year had unfavorable working capital impacts related to sales growth and inflation.
We had capital expenditures of $7.6 million in the second quarter, primarily relating to investments to expand capacity in our higher margin businesses and enhance productivity through automation.
We also returned nearly $12 million in cash to shareholders through dividends and share repurchases, and we paid down $25 million in debt in the quarter.
This debt reduction further strengthened our balance sheet with our net leverage ratio coming down to 0.7 times trailing 12-month adjusted EBIT debt.
Turning to our updated fiscal year outlook, we are increasing our full year adjusted diluted EPS outlook to a range of $4.35 to $4.65.
primarily reflecting the strong results in the second quarter.
This updated outlook implies full year adjusted EPS growth of 9% to 17% compared to last year's adjusted diluted EPS of $3.98.
We also continue to expect flat to slightly declining net sales for the fiscal year.
As a reminder, Fiscal 24 is a 53-week year with an extra week of operations in the fourth quarter.
For the full year, the extra week is expected to add approximately two percentage points of growth to revenue.
Our outlook range contemplates the latest market forecasts, which point to a potential slowdown in non-residential construction in the second half of our fiscal year.
Any impact of this would more quickly affect the shorter cycle businesses within framing and glass.
As in past years, we expect the fourth quarter will be the lowest revenue and margin quarter for framing due to the seasonality of the winter construction season.
We expect framing margins for the full year will be near the top of its 9 to 12 percent target range.
For GLAS, although we expect revenue growth and margin levels to moderate in the second half of the year, we expect the full fiscal year operating margin to be toward the higher end of the 10 to 15 percent target that we articulated last quarter.
We expect services revenue and operating margin to increase in the second half of the year compared to the first half, primarily due to the progression of work on active projects.
Although services margin should improve as we move through the year, we expect that it will likely fall short of the seven to nine percent target range for the fiscal year.
We expect sales and margins in large-scale optical to improve sequentially in the second half of the year as customer inventory levels rebalance.
As I mentioned earlier, we expect corporate costs for the third and fourth quarters to trend more closely with the level of expense we incurred in the first quarter.
We continue to expect an average tax rate of approximately 24.5% and full year capital expenditures of $50 to $60 million. We also continue to expect both operating and free cash flow growth for the full year. We are very pleased with an AMS initiative, an improved project pipeline and services, continued emphasis on improving mix and framing, and potentially using our strong balance sheet for attractive M&A.
For what they target for project types.
Really helpful. And then if I could just sneak one last one here is just on the glass segment.
You are performing very well operationally there just how much more runway do you have left with mixed improvements and the glass segment for the rest of the year.
Well I would start as Matt said in his comments.
I would look at this quarter is everything went.
Great like everything that could go well in terms of mix.
In terms of price in terms of productivity in terms of execution. So I would say this this quarter is kind of a snapshot of when demand is at the right level and we've got.
The highest mixed premium mix that we can get into our bookings and revenue. This is what a really great quarter would look like as he talked to I wouldn't put this now as a new benchmark that we don't expect that that to continue at that level and certainly from a margin perspective.
We re guided to that 10% to 15% in good demand markets and seeing them on an annualized basis perform at the high end of that range is where we want to be we think that allows us to maximize the profit dollars.
And so we don't want to we don't want to tip over here and all of a sudden get fixated on margin percentage because that business is generating very nice return on invested capital now it's generating great income dollar growth and we want to stay focused on making sure. We're at the right price points right margin level rate mix that we can grow those profits.
Yeah.
Great. Thanks for taking the questions guys.
Thank you Leo.
Thank you.
Please standby for our next question.
Yes.
Our next question comes from the line of Jon Braatz with Casey Your line is open.
Morning, everyone.
Good morning, John .
Hi, a question.
And that.
As you look forward, you're going to be spending some money on.
Organic opportunities.
And I guess my question is are we talking about maybe new products new geographies.
Specifically what are the some of the things that you might be thinking.
In terms of organic growth opportunities.
I would look at it if you look at our non resi construction business, which is the bulk of our business I would I would first think about new geographies.
So looking at how can we expand our reach into other parts of North America. So those are areas. We've looked at in the past we wanted to make sure that we are at the right margin level and understood where we could best differentiate whats in the portfolio today.
In support of that as well, we are making some capacity investments as well as some productivity investments those productivity investments not only help us with growth, but it can help in terms of R&D service and lead time capabilities, which also is a way for us to differentiate so were made.
We have made and are making some capital investments this year that kind of give us a combination of that will help us on the productivity side, but they're also going to give us some stronger capabilities from a service level standpoint that we think helps us.
Even take share in the markets that we're in.
We're always introducing or working with customers from a new product perspective, but I would say right now as we look at those we don't see things other than the coder investment we made in large scale optical we don't see things that are going to take a major capital investment at <unk>.
This point to introduce a dramatically new product offering into the market space.
As we look at diversification in the portfolio and you think about adding new products.
That really move us into other adjacencies within the segments, we're already playing in acquisitions as a likely a way for us to step into that sure sure.
When you speak about new geographies.
Organically speaking.
We're not talking about a.
New footprint, but.
But just expanding existing facilities and making those capital investments in and current facilities as opposed to new Greenfield plants.
Plants.
It could be a combination of both.
But I think you'd see CSP thoughtful in how we do that.
I am.
I like our real options approach. So if we think there is there is an untapped market that were really missing an opportunity on let's say on the on the west coast.
How would we step into that and an optional way that gives us some presence and our ability to serve the local market before we would make major investments in terms of manufacturing say coding extruding capabilities et cetera. So as we look at those geographies I think.
We can reach some of those with some additional capacity in existing facilities.
<unk> logistics and our ability to have short lead times will limit just how much we can do there so even incremental step of having a distribution center warehouse et cetera. They are small things, we can do that to make some.
Minor investments to get our footprint in a market and then prove that out before we make some significant capital investments in equipment.
It sounds great. Thank you very much.
Thanks, John .
Thank you.
I'm showing no further question in the queue I would now like to turn the call back over to CEO Tae sik.
Marx.
Alright, well, thanks, everyone for joining us today.
Other great quarter for apogee, we couldnt be more proud of our team and the accomplishments that we've delivered to date and as we touched on we still see a lot of opportunities for our business as we move ahead.
We look forward to talking to everyone in the next quarter have a great day.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation you may now disconnect.
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