Apogee Enterprises, Inc. (NASDAQ:APOG) Q4 2024 Earnings Call Transcript April 18, 2024
Apogee Enterprises, Inc. misses on earnings expectations. Reported EPS is $0.712 EPS, expectations were $0.97. APOG isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good day, and thank you for standing by. Welcome to Q4 2024 Apogee Enterprises, Inc. Earnings Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions] Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your speaker today, Jeff Huebschen, Vice President, Investor Relations. Please go ahead.
Jeff Huebschen: Thank you, [ph]Gigi. Good morning, everyone, and welcome to Apogee Enterprises fiscal 2024 fourth 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, and 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 a 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. With that, I’ll turn the call over to you, Ty.
Ty Silberhorn: Thank you, Jeff. Good morning, everyone, and thanks for joining us today. The fourth quarter was a strong finish to another great year for Apogee. Our team achieved tremendous success through executing our strategy. Strengthening our operational foundation and driving record financial results. Today, I’ll comment on our key accomplishments in fiscal ’24, how our strategy is driving sustainable improvements in our business and our priorities as we move into the new fiscal year. Then I’ll turn it over to Matt for more details on the quarter and our fiscal ’25 outlook. Three years ago, we embarked on a new strategic direction with the goal of building a stronger foundation for long-term profitable growth. An overview of that strategy is shown on Page four in today’s presentation.
At its core, our strategy is focused on building differentiated businesses that provide compelling value for our customers and improving operational execution across our entire company. During the past year, our team made strong progress on both fronts as highlighted on Slide 5. We delivered significant productivity gains through the continued deployment of the Apogee Management System, or AMS. As a reminder, AMS is our operating framework based on the foundations of lean and continuous improvement. Our deployment of AMS has led to meaningful cost and productivity improvements, while enabling us to meet or exceed customer expectations to improve quality, service and delivery. We also continue to grow our mix of differentiated products and services.
In Architectural Glass, we advanced our shift toward premium, higher value-added offerings. In Framing Systems, we further rationalized our product portfolio, completing our move away from less differentiated lower-margin products. And in large-scale optical, we increased the mix of our highest-performing products. We also made progress towards strengthening our core capabilities. We continue to build out center-led functional expertise to better support the needs of the business. We added to our talent management programs and we further strengthened our approach to governance and sustainability. These efforts were evident in our fiscal ’24 financial results. Full year adjusted operating income increased 16% to a record $146 million. Adjusted EPS grew 20% to a record $4.77.
And cash flow from operations nearly doubled to a record $204 million. These results were particularly impressive given some of the headwinds we faced on the top line during the year, with net sales declining by 2%. Throughout the year, our improved results were led by exceptional performance in Architectural Glass. The glass segment delivered double-digit sales growth every quarter this year. And segment operating margin doubled compared to last year. These terrific results reflect the strategic transformation of our glass segment. We’ve significantly improved our cost structure, delivered meaningful productivity gains through AMS and drove our sales mix toward higher value-added premium products. We made strong progress in fiscal ’24 to achieving the financial targets we set out in November of 2021, as shown on Page 6.
Adjusted ROIC improved to 16.5%, well above our 12% target. Adjusted operating margin also exceeded our target, coming in at 10.3%, a 160 basis point improvement compared to last year. On revenue growth, we fell short of our goal of outgrowing our industry. Some of this was a function of our purposeful strategy. At the outset of our strategic plan, we emphasized that our initial focus was to improve ROIC and operating margins while growing our overall profit dollars. We’ve had great success with all three of these goals. As part of our strategy, we’ve moved away from some lower return product and service offerings and are doing so again with Project Fortify, all of which created a headwind for revenue. Revenue was also impacted by the dynamics in our end markets.
Overall growth in non-residential construction was very strong last year. However, much of this growth was driven by mega projects in infrastructure and manufacturing along with warehouse and data center build-outs. These are sectors of the market where Apogee has a relatively low participation with our current product offerings. Many parts of the market, where we play saw decelerating growth rates, which impacted the shorter cycle parts of our business. We remain committed to our target of outgrowing the market, and this is the primary focus for our team as we move forward. In addition to our enterprise financial targets in November 2021, we established margin targets for each of our segments, which are shown on Page 7. Three of our four segments performed within or above the target adjusted margin ranges this year.
Earlier in the fiscal year, we increased the target range for architectural glass from 7% to 10% to a range of 10% to 15%. With the strong performance of Framing Systems the past two years, along with the strategic actions we announced in January, we are also increasing framings target range to 10% to 15%. Architectural Services margin level was below the target range, but did improve sequentially throughout the year. We see the opportunity for further progress in services this fiscal year. As we move into fiscal 2025, we intend to build on the gains we’ve achieved while positioning the company for stronger long-term growth. Over the next 12 months, we see a mixed picture for our end markets, as shown on Slide 8. We do see some headwinds in the market as do the leading market research firms, especially in some of the key segments in which we play.
Most industry forecasts call for further deceleration in nonresidential construction over the next year even if the overall growth level remains in positive territory. The commercial segment of the non-resi construction market has been impacted by higher interest rates, tighter lending standards and increased costs. This includes sectors such as office and retail. On a more positive note, institutional and infrastructure projects appear poised for continued growth over the next year. This includes sectors such as healthcare, education, and transportation. Our team has had good success diversifying our business into these end-market verticals. This will remain a focus in the coming year as we mitigate those larger segment headwinds and position ourselves for a strong revenue rebound in fiscal ’26.
Regardless of the macro environment, we have driven sustainable improvements across our business that puts us on a solid foundation. Our company is well positioned to continue delivering strong results as we move forward. I’d like to elaborate on a few of our priorities in the coming year. Let me start by discussing Project Fortify on page 9. Project Fortify further advances our company’s strategy. It builds on the success we’ve achieved, further improving our cost structure, enabling productivity gains, and allowing our team to focus on higher growth, higher return opportunities. These actions were primarily focused on framing systems. Framing has achieved strong performance gains, moving from mid-single digit operating margin in fiscal ’21 to a 12% range over the past two years.
Project Fortify positions framing for further margin gains, which is reflected in our increased margin target for the segment. It also brings more clarity to our go-to-market strategy, positioning the business for future growth. I spoke earlier about the Apogee management system. Driving further productivity gains through the deployment of AMS will remain a focus in fiscal ’25. We view AMS as a multi-year journey, building a culture of operational excellence, as outlined on page 10. In fiscal ’25, we will continue to broaden the scope of AMS across our company. We believe AMS will generate incremental costs and productivity gains, improving margins, and helping us offset potential market headwinds. Next, I’d like to address our increased focus on growth, which is outlined on page 11.
We are driving a growth mindset in everything we do, given that we serve a very large and diverse set of end markets. That means there are always opportunities for growth. We are focused on seizing those opportunities to outperform the overall market. Our combination of leading brands, deep customer relationships, and differentiated offerings positions us to gain share in a fragmented industry. We are pursuing geographic expansions, particularly in services and in framing systems, expanding our reach to portions of the U.S. and Canada where we are underrepresented today. We also see opportunities for share gains by continuing to improve our service levels and our product performance. With the recent growth in services backlog, we may already be seeing some flight to quality with customers seeking to de-risk their projects by working with industry-leading suppliers like our Harman brand.We will also continue to diversify our sales mix, focusing on higher growth sectors of the market.
This includes expansion into attractive adjacencies, particularly within large-scale optical. Finally, we will continue to evaluate investment opportunities that will accelerate our growth, including both organic investments and acquisitions. To wrap up, we are very proud of the progress that we’ve achieved. We have established a stronger foundation for our company, and we have significantly improved our financial performance. Our team is focused on building on these gains, driving organic and inorganic growth opportunities to further accelerate our earnings and margins in the years ahead. With that, let me turn it over to Matt.
Matthew Osberg: Thanks, Ty, and good morning, everyone. First, I’ll begin with a review of our results in the quarter, then I will summarize some of the highlights of the full year. Finally, I’ll discuss our outlook for fiscal ’25. The fourth quarter was a strong close to fiscal 24 as we delivered adjusted operating margin expansion, adjusted EPS growth, and continued to generate exceptionally strong cash flow. We also achieved meaningful backlog growth in the longer lead time parts of our business. As a reminder, the fourth quarter and the full year included an extra week of operations compared to fiscal ’23. Looking at the results for the fourth quarter, net sales grew 5% to $362 million. This growth was driven by improved pricing and mix, especially in glass.
This was partially offset by lower volumes, primarily in framing. Fourth quarter results included $12.4 million of restructuring charges related to Project Fortify, of which $5.5 million was included in cost of goods sold and $6.9 million was included in SG&A. Including these charges, fourth quarter gross profit increased 13% and gross margin improved by 170 basis points, driven by improved pricing and mix and the benefits from cost-saving initiatives. SG&A expense increased $14.2 million to 18.4% of net sales, compared to 15.2% of net sales in last year’s fourth quarter. The increase was primarily due to restructuring charges associated with Project Fortify, along with higher compensation-related costs. Operating income was $21.9 million or 6% of net sales.
Excluding the impact of restructuring, adjusted operating income grew 33% and adjusted operating margin expanded 200 basis points to 9.5%. This was primarily driven by improved segment operating margin in glass. Diluted EPS was $0.71 and adjusted diluted EPS grew 33% to $1.14. This was primarily driven by higher adjusted operating income. Turning to the segment results for the quarter, framing net sales declined 6.3% due to lower volumes, reflecting the deceleration in commercial construction activity that Ty described. Framing results included $6 million of restructuring charges related to Project Fortify. Excluding these charges, adjusted operating margin for framing contracted 130 basis points to 9.2%, primarily due to the impact of lower sales volume and a less favorable mix of projects.
Framing backlog increased 9% compared to the third quarter to $201 million. As a part of Project Fortify, we are phasing out some of the longer lead time work within the framing segment. Going forward, most of the projects and framing will be completed in six months or less, making backlog a less relevant measure for the segment. As a result, beginning next quarter, we will no longer report backlog for the framing segment. The glass segment continued to outperform our expectations driven by improved pricing and mix. Net sales for glass grew 18% and segment operating income nearly doubled to $18.9 million, while segment operating margin expanded 800 basis points to 19.7%. Services sales grew 8% to $106 million, and adjusted operating margin increased by 210 basis points to 5.8%, primarily driven by a more favorable mix of projects partially offset by higher compensation costs.
Services backlog ended the quarter at $808 million. This is 4% higher than the third quarter and 11% above last year. This reflects our strong market position as we’ve significantly increased backlog even in a more challenging market environment. Importantly, the backlog growth in services reflects our continued efforts to diversify our project mix with significant wins in the hospitality, health care and transportation sectors. LSO sales were essentially flat year-over-year with improved mix offsetting lower volume. However, operating margin improved by 450 basis points to 25.6%, reflecting the improvement in mix. Corporate expenses increased primarily due to $3.9 million of restructuring charges related to Project Fortify and higher compensation-related costs.
Turning to cash flow. We had another strong result, generating $75 million of cash from operations in the quarter compared to $52 million in last year’s fourth quarter. Our primary use of cash in the quarter was debt reduction as we paid down $39 million of debt. This brought our net leverage ratio down to 0.1 times trailing 12-month adjusted EBITDA. Looking at the full fiscal year, we are very proud of the results we delivered. Adjusted operating margin increased 160 basis points to 10.3%. Adjusted diluted EPS grew 20% to a record $4.77. Cash flow from operations nearly doubled to $204 million for the best cash flow in the company’s history. During the year, we paid down our debt by $108 million and invested $43 million in capital expenditures, which funded a capacity expansion in LSO and other projects to enhance productivity through automation.
We also returned $33 million of cash to shareholders through dividends and share repurchases. Adjusted ROIC continued to improve as well, reaching 16.5%. For the segments, Glass grew net sales by 20% and operating income by almost 140% while doubling operating margin. Despite lower sales and framing, the segment delivered adjusted operating margin at the top of the 9% to 12% target range. Services sales declined and margins remained below our 7% to 9% target range, but we expect both top and bottom-line improvements in fiscal ’25. LSO sales declined, but margins remained very strong at over 24%. Moving to our outlook for fiscal ’25, we expect net sales to decline 4% to 7%. This range includes approximately two percentage points of decline related to fiscal ’25 reverting to a 52-week year and approximately one percentage point of decline related to the actions of Project Fortify to eliminate certain lower-margin product and service offerings.
Also, as Ty discussed, we expect decelerating end market growth this year to put pressure on volume and pricing in the framing and glass segments. We expect sales declines in framing and glass to be partially offset by growth in services as we execute a strong pipeline of projects in our backlog, with LSO sales approximately flat as retail channel headwinds offset new channel adjacency growth. Looking at adjusted operating margin trends, we expect our fiscal ’25 consolidated margin to remain approximately flat to fiscal ’24. We expect framing margins to improve and be within the new elevated target range of 10% to 15%. We expect the glass segment will moderate compared to fiscal ’24 and move back into the 10% to 15% target range with higher margins expected in the first half of the year and sequentially declining as the year progresses.
We expect services margins will improve and move closer to the 7.9% to the 7% to 9% target range. We expect LSO margins to decline as we expand into new adjacencies and begin to depreciate the capital assets for our capacity expansion, but still be above the 20% target range. Finally, we expect corporate costs to return to levels approximating what we incurred in fiscal ’23. We are forecasting adjusted diluted EPS in a range of $4.35 to $4.75, with the impact of the reversion to a 52-week year expected to reduce adjusted diluted EPS by approximately $0.20 with no expected material EPS impact related to the adverse net sales impact of Project Fortify. We expect an average tax rate of approximately 24.5% and anticipate $40 million to $50 million of capital expenditures during the year.
Finally, we expect lower cash flow from operations as the working capital changes that impacted the past two years begin to normalize. Looking at the quarterly cadence of the year, we expect the first quarter to be our lowest level of sales and EPS for the year with the fourth quarter comparison to prior year being impacted by the additional week in fiscal ’24. In closing, this was another strong quarter to finish a great year. Over the past three years, we have built a stronger financial and operational foundation for the company, and we believe there are opportunities to continue to make organic and inorganic investments in the business to build on what we have already achieved. With that, I’ll turn it back over to Ty for some concluding remarks.
Ty Silberhorn: Thanks, Matt. To wrap up, I want to thank our team for delivering another strong quarter. I’m really proud of what we’ve accomplished and more importantly, I’m excited about the opportunities ahead for our business as we focus on growth. Execution of our strategy has driven sustainable operating improvements across our business. We’ve achieved meaningful cost and productivity improvements, grown our mix of differentiated products and build a stronger set of core processes and systems. . These operational improvements have led to a step change in financial performance and created a solid foundation for us to weather any slowdown and creating a strong profit leverage as volume increases as we saw with glass in fiscal ’24. Our team is focused on building on these improvements and delivering another successful year in fiscal ’25 while positioning us for a strong fiscal ’26. With that, we’re ready to take your questions.
Operator: [Operator Instructions] Our first question comes from the line of Julio Romero from Sidoti & Company, LLC.
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