Apogee Enterprises, Inc. Aktie

Good day, and thank you for standing by. Welcome to Apogee Enterprise's Fourth Quarter Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes.

I will now turn the conference over to Jeremy Steffen, Vice President, Investor Relations and Communications to begin. Jeremy, please go ahead.

Thank you. Good morning, and welcome to Apogee Enterprises Fiscal 2026 Fourth Quarter Earnings Call. On the call today are Don Nolan, Apogee's Chief Executive Officer; and Mark Augdahl, our Chief Financial Officer. During this call, the team 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, which are available in the Investor Relations section of our website.

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 our press release and in the company's SEC filings. With that, I'll turn the call over to Don.

Thanks, Jeremy, and good morning, everyone. We're glad you could join us for our fourth quarter earnings call. let's spend more time with the business over the past several months, engaging with our teams, visiting our operations and working closely with our leadership group, have gained a deeper appreciation for both the strengths of our portfolio and the discipline embedded in how we operate. While the market environment continues to evolve, we are focused on executing with us within our control, managing through near-term pressures and continuing to build a strong foundation for long-term sustainable performance.

I'm confident in the organization we have in place and the enhanced strategic direction we are taking as we move forward. With that said, I'm pleased to share that our results for the quarter were ahead of our expectations on both the top and bottom line despite what continues to be a dynamic and challenging environment. I'd like to thank our team of dedicated and resilient employees for their focus on delivering exceptional products and services to all of our valuable customers.

Fiscal 2026 was a year of disciplined execution for Apogee as we navigated a difficult environment while continuing to strengthen our operating foundation. Our teams delivered meaningful gains in safety, service and productivity and generated solid cash flow. I'd like to emphasize 3 areas that position us particularly well for the future. First, Performance Services successfully integrated UW solutions into the segment. They delivered upon the first year financial targets for the acquisition of $100 million in revenue and adjusted EBITDA margin of at least 20%. The total segment delivered revenue of almost $200 million and an accretive margin for the company, and we're excited for the future given the expanded market, greater geographical reach, along with the added substrate capability and coding technology.

Second, the Apogee management system continues to drive meaningful improvements across our manufacturing footprint, utilizing technology with embedded AI. Last fiscal year, our Architectural Metals segment made significant progress improving outcomes for our Tube lay brand, completing a value stream redesign, which resulted in improved service levels and lead times. We also reconfigured our Linetec finishing facility in Wassa, Wisconsin, creating a tighter, more connected footprint that streamlined anodizing, paint and packaging operations.

This drove significant reductions in material movement, ultimately creating a leaner and safer environment. EMS has truly become a cornerstone of Apogee's operating success creating a safer work environment for our teams, delivering better quality, service and reliability for our customers and building a culture of continuous improvement that will drive even stronger outcomes in the years ahead.

And third, we actively managed our cost structure and manufacturing footprint to mitigate portions of direct and indirect tariffs while driving efficiencies across the organization. These decisions were difficult, and we certainly don't take them lightly, but we are confident that the actions further position Apogee to successfully navigate the market headwinds we see today and expect in the near future.

What we delivered in fiscal 2026 reflects more than just execution. It reflects the strength of a strategy that has guided Apogee through change and positioned us to lead. The strategy we put in place in 2021 continues to serve us well with a clear focus on becoming the economic leader in our target markets, actively managing our portfolio and strengthening our core capabilities and platforms. That focus has driven meaningful improvement across the business, including a more competitive cost structure through facility consolidation and organizational alignment, tighter supply chain integration and greater leverage of enterprise back-office functions.

At the same time, the Apogee management system delivered substantial gains in productivity and safety. We elevated pricing discipline and sharpened our portfolio, resulting in higher margins and increased profit allows over the past 5 years.

Moving forward, we are enhancing these strategic pillars to position Apogee as a more growth-oriented customer-obsessed organization. Pillar #1 is focused on accelerating leadership in target markets by differentiating through deep customer focus and insight, shaping what we offer and how we deliver it to be the economic leader in the markets we serve. The second pillar involves growing and strengthening the portfolio through organic and inorganic advancements and differentiated solutions that address evolving customer challenges and deliver lasting value.

And the third pillar is all about advancing core capabilities by driving a culture of continuous improvement through operational excellence, talent development and technology that truly elevates the customer experience. Building on the progress we've made, we continue to identify areas for growth in nonresidential construction markets. We see opportunities to further leverage our deep knowledge of this industry by offering differentiated products, project expertise and strong customer relationships across architectural building products and services.

At the same time, we are evaluating adjacent opportunities and growth avenues that build on our core capabilities and performance services, including the selective expansion of substrate capabilities and advanced coating technologies. These opportunities have the potential to extend our reach into new markets and geographies, broaden our end market exposure and provide platform-style growth options for the future.

Our focus remains to be disciplined on execution and thoughtful with our capital allocation as we evaluate opportunities intended to support durable returns, long-term earnings and cash flow generation across the portfolio. By cultivating a broad growth mindset, deepening our commercial and customer insight capabilities and intentionally expanding into new and adjacent markets, we are positioning Apogee not only to respond to evolving customer needs, but to anticipate them, shaping demand, redefining our competitive space and creating enduring value over time.

As we look ahead, we're reminded that our industry will always move through cycles, but Apogee's future is not defined by those cycles. It's defined by the choices we're making today. By investing in the strategic growth areas where demand is strongest and by elevating our focus on delivering exceptional value to our customers, we're building the company positioned not only to navigate the near-term environment, but to achieve long-term sustainable success.

I'm deeply proud of what our teams have accomplished, and I'm even more confident in where we're headed. Together, we are creating Apogee that is stronger, more resilient and capable of delivering exceptional value for all stakeholders. With that, I'll turn it over to Mark to cover the financials and our fiscal 2027 outlook.

Thanks, Don, and good morning, everyone. First, I'll begin with a review of the results of the fourth quarter, followed by full year commentary and then discuss our outlook and assumptions for fiscal '27. Starting with our consolidated results. Net sales increased 1.6% to $351.4 million, primarily reflecting favorable pricing in the Metals segment that helped offset a portion of higher aluminum costs. Favorable mix also contributed, partially offset by lower overall volume. Adjusted EBITDA margin increased to 12.1% compared to 11.9% a year ago. The improvement was primarily driven by lower incentive compensation and risk-related insurance expenses, along with productivity improvements.

We also benefited from cost savings associated with Fortify Phase 2 with actions substantially completed during the quarter. The improvements were partially offset by higher aluminum costs. The impact from the reduction in volume and higher health insurance costs. Adjusted diluted EPS was $0.92, slightly ahead of our expectations and up year-over-year, primarily driven by lower amortization and interest expense.

Turning to our segment results. Metals net sales declined approximately 2% to $110 million. reflecting continued challenging market conditions. The decrease was primarily due to lower volume, partially offset by favorable price and product mix. Despite the revenue decline, adjusted EBITDA margin improved to 6.5% driven by cost savings from Fortify Phase 2 and favorable product mix. partially offset by higher aluminum costs that were not fully offset by those pricing actions and the impact of lower volume.

The Services segment delivered its eighth consecutive quarter of year-over-year net sales growth primarily due to increased volume from project timing, partially offset by price. Adjusted EBITDA margin decreased to 7.5%, mostly driven by lower price, partially offset by the impact from higher volume and improved productivity. Backlog for services ended the quarter at $694 million, down approximately 4% compared to the prior year, but we are well positioned entering the upcoming fiscal year.

Glass net sales declined to approximately $67 million, primarily driven by lower volume and price due to continued end market demand softness. Adjusted EBITDA margin also declined to 13.5% due to lower volume and price and higher material and freight costs, partially offset by productivity improvements, lower incentive compensation and warranty-related expenses.

Performance Surfaces net sales increased to over 13%, driven by volume growth, supported by share gains in the retail and fine arts market channels. Adjusted EBITDA margin decreased due to higher material and manufacturing costs, partially offset by net sales leveraged from higher volume. On a full year basis, the company net sales increased 3.2% to $1.4 billion, driven by $65.3 million of inorganic contribution from the acquisition of UW Solutions. This growth was partially offset by lower volume, reflecting softer end market demand in metals and glass throughout the fiscal year.

Adjusted EBITDA margin declined to 11.9%, primarily due to higher aluminum costs as well as the impact of lower volume and higher health insurance costs. These headwinds were partially offset by lower incentive compensation and risk-related insurance expenses and savings generated under Fortify Phase 2.

Turning to cash flow and the balance sheet. Net cash provided by operating activities was $55.8 million in the quarter compared to $30 million a year ago. The improvement was driven by higher net income and working capital improvements. On a full year basis, net cash from operating activities was $122.5 million and similar on a year-over-year basis. Also during the fiscal year, we used $27.3 million for CapEx, prioritizing investments that drive operational efficiency and margin improvement.

In the fourth quarter, we repurchased $15 million of stock. And on a full year basis, returned $37.2 million to shareholders through dividends and share repurchases. Our balance sheet remains strong. with a consolidated leverage ratio of 1.3x, no near-term debt maturities and significant capital available for future deployment. Looking ahead to fiscal 2027, the market characteristics are expected to remain relatively unchanged, especially in the first half. We anticipate continued competitive pricing and volume pressure in the metals and glass segments, elevated long-term interest rates and a dynamic macroeconomic environment.

External indicators, including the Architectural Billings Index and FMI reflect ongoing softness in the operating environment throughout the year. Amid these conditions, we remain focused on executing the enhanced strategy Don referenced earlier, which is positioning the business to drive organic and inorganic growth over time. While we remain confident in the long-term fundamentals of our business, the pace and direction of global economic conditions continue to be in flux. And as a result, we've set wider full year sales and EPS ranges to ensure our guidance reflects the realities of today's operating environment.

For fiscal '27, we expect full year net sales between $1.38 billion and $1.43 billion and adjusted diluted EPS in the range of $2.70 to $3.25. This guidance includes the following headwind assumptions, normalization of corporate incentive compensation expense, elevated aluminum and fuel cost inflation and persistently rising health insurance expense. These are partially offset by benefits from the fourth quarter Fortify 2 actions in Metals and Corporate, prior year tariff costs that have since been mitigated and will be tailwinds mostly impacting the first half and pricing actions expected to offset incremental inflationary costs.

And finally, continued emphasis on cost controls across the organization. We anticipate generating slightly more revenue and profit in the second half than the first as macroeconomic factors are expected to improve throughout the upcoming fiscal year. Additionally, we expect interest expense of approximately $10 million and adjusted effective tax rate of 26% to 27% and capital expenditures between $35 million and $40 million.

Looking ahead to the first quarter, we expect net sales to be slightly lower and adjusted EPS to be lower on a year-over-year basis. We also expect operating cash flow generation to start the year strong, reflecting disciplined execution and working capital management. As we look ahead, we recognize we are operating amid a challenging macroeconomic environment marked by pricing pressure, elevated interest rates and uneven demand. Even so, our focus remains firmly on what we can control, operating safely, executing with discipline and managing the business for long-term success.

I want to thank our employees for their continued dedication and execution and our customers for their trust and partnership. Importantly, our strong cash generation and disciplined approach to managing our balance sheet provides the flexibility to reinvest in the business, advance our strategic priorities and return capital thoughtfully. That financial strength gives us confidence in our ability to navigate near-term headwinds while positioning Apogee for sustainable performance and driving long-term value for all stakeholders.

With that said, we will now open up the call to questions. Operator, please go ahead.

[Operator Instructions] Our first question comes from Julio Romero with Sidoti & Company.

Mark, I appreciate you running through some of the headwinds and tailwinds in the guidance in your prepared remarks. I was hoping you could help us out with putting a finer point on any effect baked in for the year-to-date rise in aluminum prices? And kind of what assumptions are baked in in terms of price increases to help offset that?

Sure. So first of all, yes, aluminum has been an interesting thing to be tracking, and we've been doing so diligently. I think we've seen about 87% increase in aluminum costs over the past year and 25% increases since -- just since January. So yes, very dynamic market as it relates to that. As far as how we're thinking about that, we're certainly making those increases in. We, at this point, have no idea what's going to happen to aluminum costs going forward. But we are certainly addressing price or addressing -- offsetting those costs that we've seen by implementing price as appropriate. We're looking at all levers around that price too, whether it be surcharges or regular price built into our normal pricing processes. So certainly a drag on the year, which is reflected in our outlook. But we're doing all that we can to mitigate those impacts.

Got it. Very helpful there. And then on tariffs, did I hear you guys correctly that the tariff impact from the prior year is essentially fully mitigated and should be a tailwind in '26? And then secondly, I guess, would both that imply with regards to the recently revised tariff policy, no direct impact and just more of an indirect impact on the rising aluminum side?

Yes. That's correct, Julio. So first of all, I think we articulated last year that -- or for F '26, we had about a $9 million impact on tariffs. It was primarily as it relates to our supply chain as we move product across the border to Canada and back, that was offset with the actions that we put in place with Fortify 2, but it will be a headwind in the first half of the year. excuse me, it was a headwind in '26, it will be a tailwind now in '27.

Got you. Super helpful there. One more and I'll pass it on. Don, you mentioned in the prepared that the Apogee management system is leveraging embedded AI to drive some manufacturing improvements. Can you expand on those comments? I think you mentioned some benefit with regards to reconfiguring a finishing facility in Wassa and then another initiative on the metal side. I was hoping you could expand on those comments.

Sure. look, it's early days for us in AI for sure, but we're already starting to see some impact. We have a few things that we're looking at and using in our manufacturing facilities already. But it's early days more to come. I think the other thing that you should know is we're rolling out copilot across the company, and we're starting to see some impact as everyone gets a little bit more productive. I think -- but this is a long-term investment.

Our next question comes from Gowshi Sri with Singular Research.

On the metal side, with the aluminum headwind and Fortify that has helped you kind of maintain margins? Have you consciously shifted your mix of customers or product types stay away from certain low-margin accounts -- and should we expect more of that mix tuning as we go through FY '27?

From my perspective, we have not changed our product or customer mix as it relates to anything that's gone on with aluminum cost increases, if that's -- if I'm answering your question correctly there.

I'm just -- in metals in respect as well, have you shifted away from [indiscernible]?

No. [indiscernible] is the base of most of our product in that segment.

Yes. I mean even at this price, aluminum is the best material for these applications.

Got you. On the glass side, are you changing any price structure in terms of surcharges or contract duration so that it's not exposed to any rapid swings in input pricing?

The glass market is unique as the float suppliers do provide surcharges to us as they get impacted by various components of their cost. And to the extent that those are passed on to us, we pass them on as well.

Got you. On the Fortify,1 and 2, as SG&A is down 10%, how much of that SG&A efficiency is truly structural versus temporarily depressed by lower incentive comps? Are there any areas where you actually expect SG&A to step back up in FY '27.

It's a great point. Yes, both incentives as well as Fortify savings impacted the SG&A rate in F '26. We are reinstating our compensation programs are allowing for us STI to come back into play. So it will be a drag on our F '27 results. So therefore, I do expect our overall SG&A rate to increase.

Got you. On the performance in UW platform, you have -- you look like you have a lot of runway, but -- from an operational standpoint, are there any specific capacity bottlenecks or process constraints in that business that you need to address in FY '27 to support the sort of the next leg of growth there?

No. I mean, you hit it right on the head. We're really excited about the growth potential for Performance Services, especially our resin deck mezzanine flooring line. We continue to expand that business, not just in the United States but into Europe and elsewhere. So we are investing in that plant. And -- but short term, we don't see a problem there.

And I'm not showing any further questions at this time. I'd like to turn the call back to Don for any further remarks.

In closing, we remain confident in the actions we're taking and the foundation we've built. We're a leaner, more agile organization with a clear and urgent focus on serving the customer. I want to thank our employees for their dedication and commitment, they continue to make a meaningful difference for our customers and our company. Our strategy is clear, our discipline is strong, and we believe Apogee is well positioned to deliver long-term value. Thank you for your continued interest and support.

Thank you. Ladies and gentlemen, this does conclude today's presentation. We thank you for your participation. You may now disconnect, and have a wonderful day.

Good day, and thank you for standing by. Welcome to Apogee Enterprises Third Quarter Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes.

I will now turn the conference over to Jeremy Steffan, Vice President, Investor Relations and Communications to begin. Jeremy, please go ahead.

Thank you. Good morning, and welcome to Apogee Enterprises Fiscal 2026 Third Quarter Earnings Call. On the call today are Don Nolan, Apigee's Chief Executive Officer; and Mark Augdahl, our Interim Chief Financial Officer.

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, which are available in the Investor Relations section of our website. 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 our press release and in the company's SEC filings.

With that, I'll turn the call over to Don.

Thanks, Jeremy, and good morning, everyone. We're glad you could join us for our third quarter earnings call. Before I begin my prepared remarks, I want to acknowledge the announcement made earlier today. Matt Oseberg has informed us of his decision to leave the company to pursue an opportunity elsewhere. I want to thank Matt for his many contributions over the past 3 years and wish him continued success in the future.

Stepping in as the interim CFO is our Chief Accounting Officer, Mark Augdahl, who has been at Apogee for over 25 years. I look forward to parterning with him as we begin our search for the company's next CFO. Next, I'd like to start by saying it's a real privilege to have the opportunity to lead the company through this period of transition. While I've served on Apogee's Board since 2013, the past 2 months as CEO have given me a deeper perspective, strengthening my confidence in Apogee's future, and I'd like to share a few observations. First, our customers consistently tell us how much they value the quality and reliability of our products and services. That feedback of energizing and underscores a core principle of mind, companies that delight their customers win in the market.

Apogee has built that reputation over 76 years and continues to raise the bar. Second, across Apogee, we have exceptional talent individuals who are passionate, resilient and relentlessly focused on exceeding the expectations of customers. Their ability to deliver tremendous value, especially in this dynamic environment reinforces the strength of this company and gives me tremendous confidence in our future. And third, the Apigee management system continues to drive value across our manufacturing footprint. The returns on our AMS investments are fueling margin benefits and reinforcing the operational excellence that helps define our organization. I'd also like to highlight the UW Solutions acquisition, which celebrated its 1-year anniversary this quarter. We're pleased with the initial results and the team is on track to deliver our fiscal 2026 expectations of $100 million in net sales and approximately 20% in adjusted EBITDA margin.

UW Solutions expands our market and geographical reach adding substrate capabilities in coating technology and provides a platform for potential growth in fiscal 2027 and beyond. Now turning to our results for the quarter. I am pleased with the team's ability to deliver in a dynamic environment. This performance reflects not only disciplined execution, but also the strength of our culture and the dedication of our people. It reinforces my confidence in the strategies put in place and our ability to adapt and win in dynamic markets. Although macroeconomic factors remain challenging, Apogee is well positioned because of 3 key strengths: Operational excellence through AMS driving continued productivity improvements across our manufacturing footprint, our proven cost-out execution with 4 to 5 Phase I, Phase II and a strong balance sheet and healthy cash generation, giving us flexibility for future M&A.

These fundamentals, combined with the talent of our team enable us to navigate near-term challenges and capitalize on long-term opportunities. In the near term, our priorities remain clear and unchanged. We first, become the economic leader in our target markets with differentiated product and service offerings and competitive cost structures. Number two, managing our portfolio through pursuing accretive M&A opportunities aligned with our strategic and financial objectives; and number three, strengthening our core by driving more efficient operations, greater scalability and enabling sustained profitable growth. I'm confident in our strategy and excited about what's ahead. Together, we have the opportunity to create significant value for all stakeholders.

With that, I'll turn it over to Mark.

Thanks, Don, and good morning, everyone. First, I'll begin with a review of the results of the third quarter and then follow with commentary on our outlook for the remainder of fiscal 2026 and some early insights into fiscal 2027. Beginning with our consolidated results, net sales increased 2.1% to $348.6 million, primarily driven by $18.4 million of inorganic sales from the acquisition of UW Solutions as well as favorable product mix. This was partially offset by lower volume primarily in Metals. Adjusted EBITDA margin decreased slightly to 13.2%. The year-over-year change was primarily driven by lower volume and price and higher aluminum and health insurance costs. These were partially offset by lower incentive compensation expense and benefits from the cost savings related to Phase 2. Adjusted diluted EPS was $1.02, in line with our expectations and down year-over-year, primarily driven by higher amortization and interest expense as a result of the UW Solutions acquisition.

Turning to our segment results. Metals net sales declined primarily due to lower volume, partially offset by favorable price and product mix. Adjusted EBITDA margin improved to 13.5%, primarily driven by increased productivity, including cost savings from Fortify Phase 2, lower incentive compensation expense and favorable price and product mix. These were partially offset by lower volume. Our Services segment delivered its seventh consecutive quarter of year-over-year net sales growth primarily due to increased volume. Adjusted EBITDA margin increased to 9.7%, mostly driven to lower incentive compensation expense, partially offset by unfavorable project mix. Additionally, backlog for services ended the quarter at $775 million, down slightly from Q2, but up over 4% compared to Q3 of last year.

Glass net sales increased slightly to approximately $71 million, primarily driven by increased volume and favorable mix, partially offset by lower price driven by end market demand softness. Adjusted EBITDA margin moderated from last year, primarily due to lower price and higher material costs, partially offset by higher volume, favorable product mix and lower incentive compensation expense. Performance Surfaces net sales increased, driven by the inorganic sales contribution from the acquisition of UW Solutions, inorganic growth primarily from price. Adjusted EBITDA margin decreased primarily driven by the dilutive impact of lower adjusted EBITDA margin from the UW Solutions and unfavorable productivity, partially offset by favorable product mix and price.

Turning to cash flow and the balance sheet. For the third quarter, net cash provided by operating activities was $29.3 million, down slightly from $31 million in the third quarter of prior year. On a year-to-date basis, cash from operating activities was $66.6 million compared to $95.1 million a year ago due to lower operating cash flow in the first quarter. Our balance sheet remains strong with a consolidated leverage ratio of 1.4x, no near-term debt maturities and significant capital available for future deployment.

Turning now to our outlook for the remainder of fiscal 2026. We are updating our estimates for both net sales and adjusted diluted EPS. We now expect net sales to be approximately $1.39 billion and adjusted diluted EPS in the range of $3.40 to $3.50. This outlook includes an updated estimate of the EPS impact from tariffs of approximately $0.30. Our updated outlook assumes an adjusted effective tax rate of approximately 27% and capital expenditures between $25 million and $30 million. The current macroeconomic backdrop remains challenging, in both our metals and glass segments, competitive market dynamics continue to put a significant pressure on pricing and volume. Additionally, in our Metals segment, average aluminum prices in the third quarter rose approximately 13% compared to the second quarter and are up over 50% compared to the third quarter of last year.

These factors are driving volume pressure and margin compression and we anticipate this dynamic will continue to impact us through the fourth quarter and to some extent, into fiscal 2027. Additionally, as we look ahead to fiscal '27, we expect cost headwinds from the normalization of incentive compensation expense and higher health insurance costs. In order to offset a portion of the anticipated impact of these headwinds, we have expanded the scope of Project Fortify Phase I to include further restructuring actions primarily in metals and corporate. Based on the expected benefits of the expanded scope of Fortify Phase 2, we now expect to incur a total of approximately $28 million to $29 million in pretax charges and deliver an estimated annual pretax cost savings of approximately $25 million to $26 million with approximately $10 million of that benefit to be realized in fiscal 2027.

In addition, we expect the majority of the tariff impact of fiscal 2026 not to repeat and to be a benefit to fiscal 2027. Although we are in the initial stages of our planning for fiscal 2027, we are taking proactive measures such as the expansion of Fortify Phase 2 to manage near-term headwinds as well as position us to be more agile and better equipped to capitalize on growth opportunities as market conditions stabilize. Finally, I want to recognize and thank our employees for their resilience and dedication. Their commitment is critical to our success. By executing with rigor today, we are laying the groundwork for long-term value creation opportunities for our shareholders.

With that, we will now open the call to questions. Operator, please go ahead.

[Operator Instructions] And our first question coming from the line of Brent Thielman with D.A. Davidson.

Don, I mean a lot has changed here since the last earnings call. And maybe if you could just start off and talk about what the Board is looking for terms of new leadership on a go-forward basis? And is there any different view on the strategic direction of the company going forward versus what's been vocalized is the strategy before particularly sort of scaling the Performance Services business? .

Brent, thanks for that question. No, no change in strategy. We remain focused on the existing strategies, the strategies that, quite frankly, were working before my tenure, focused on becoming the economic leader in our target market, continue to manage the portfolio and pursuing accretive M&A opportunities in faster-growing markets, UW Solutions being the best example. And then strengthening our core, driving more efficient operations, greater scalability and enabling sustained profitable growth. So no, it's strict. There's no change whatsoever.

Okay. And sorry, Don, in terms of what you're looking for in terms of new leadership as you're out with CEO search here.

Yes. So look, we started our process. And clearly, we're looking for someone who has deep growth and operational excellence experience, M&A integration, the things that are called out in our strategy.

All right. And then, I mean, in terms of the updated outlook, it looks to me like the big impact there is just this continued inflation and aluminum that we continue to see post first quarter, I assume, is predominantly impacting the metals [indiscernible]. Yes.

I'll let you follow up with your -- the rest of your question.

No, just in regard to the outlook and the updated outlook looks like it's primarily the metals segment, I presume. If that's the case, looks like you're sort of embedding a more severe impact to margins in metals in the fourth quarter relative to what you saw in the third quarter? Is that the right way to think about this? .

Yes, Brent, good observations. So yes, both -- I would say, both in metals and in glass, the market dynamics continue to be very -- they continue to evolve. So yes, back on metals, the primary issue there is the aluminum prices continue to increase in our prepared comments. We commented that between Q2 and Q3 aluminum prices went up 13%. And then even here in December, we're seeing continued increases in that price. So the margin pressures continue to build. And then maybe a little bit in glass as well. We have about a 60-day window on what we can see for orders. At the end of Q3 -- or excuse me, at the end of Q2, we thought that we would kind of maintain that level, but we're seeing slightly declines there. So we're, again, seeing a little bit of an impact both on volume and price going into the fourth quarter. I would tell you, though, that we remain focused on managing our margin dollars. So as to the best of our abilities, we're controlling costs and implementing things that we can control those costs, Fortify Phase 2 expansion as an example.

And I guess notwithstanding some of the short-term pressures that you are seeing in the market, are the long-term kind of EBITDA margin targets that you laid out before to sort of appropriate to think about. Again, no, there's going to be some nuances in the near term for some of the things you called out. .

That's exactly right, Brent.

Our next question in queue coming from the line of Jon Braatz with KCCA.

Oh, I'm sorry. I missed my queue. Don, I just want to go back to the sort of the strategic direction of the company. And how much emphasis you might place on M&A activity because let's face it, in the past, it just -- it hasn't turned out to M&A activity hasn't been that positive for Apogee. And it seems to me that folks should be almost exclusively on running the business as profitably as possible returning cash flow to shareholders in terms of dividends and share repurchases. So I want to get a better sense from you as where you see M&A going forward?

Well, look, our pipeline for M&A is robust. It's very active right now. And we have spent a great deal of time and energy building all the processes and systems in the company to continue to drive M&A UW Solutions was a great acquisition for us. 12 months in. We have achieved or beat all of our objectives. So -- it's a business that's growing robustly. Our Performance Services business, that segment was able to successfully integrate the UW solutions almost doubling the size of the business and deliver organic growth at the same time. So we've demonstrated that we can execute. We can select a great acquisition that works for -- in our strategy. We have the discipline to execute on the integration, and we continue to work our pipeline aggressively.

Okay. Another question. In the fourth quarter of last year when Project Fortify was announced you mentioned $26 million in costs that will be incurred in savings of $13 million to $15 million. And this quarter, you said cost of $28 million to $29 million, a little bit higher but savings of $25 million to $26 million. What's the difference between the fourth quarter savings and what you said here in the first quarter? Am I -- heard something wrong there? .

No. Jon, I'll take that. Yes, the ranges that you provided were accurate, the increases in costs are primarily head count based and holding our cost structure tight. We did incur some footprint-related matters in the fourth quarter here, which was the primary cost in the fourth quarter. But again, we're focusing on things that will drive cost savings going forward.

So the cost savings, $13 to $15 to $25 million to $26 million, that's -- I'm correct with that number?

Yes, that's what we're showing. .

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

My first question is on the metals and gas. I know you guys have mentioned some pricing discipline with keeping the plans efficiently utilized -- how are you thinking about the bid approval process threshold and hurdle margins over the 6 months? I mean have you walked away from any large projects or packages that might recently that might leave kind of underabsorption risk in early fiscal '27? And are you willing to -- or when will you start considering the flexibility around the pricing discipline? .

I'll start off and then turn it over to Mark. But look, glass is a highly competitive market, but the Glass team has been working hard to maximize EBITDA dollar contribution while protecting their premium margins. They face significant challenges on volume and price. True. But look, the business is in a much stronger position than during the last downturn. Even with the market challenges that we face today, Glass is still operating in the teens EBITDA margin versus mid-single digit in the last downturn. So yes, we're going to continue to focus on maximizing EBITDA dollar contribution as we move -- as the market shifts.

Don, I don't really have anything to add. I think you covered off what I thought was important, which is we implemented some really, really nice and solid pricing strategies as we were executing our -- initiating our current strategy, and we intend to continue on that process. Of course, volume matters. So we need to look at every project and every opportunity when they come across.

The other thing I would mention is, as was pointed out, Fortify 1, Fortify 2, we continue to actively manage our cost structure to mitigate these short-term headwinds. So in addition to making sure that we hold on to our margins and manage the top line appropriately, we're also managing our cost structure.

Got it. And are you seeing any noticeable pricing differences between you say, your strategic repeat customers as opposed to your more transactional work. Has that gap kind of widened or narrowed since we spoke in Q2? .

No, I don't think so. I think -- look, we're seeing higher volume of projects in glass for sure. And on average, a little smaller than what we've seen in the past.

It's a very challenging environment. There you go. Thank you.

Yes. And on the Performance Services side, can you kind of unpack on how much of that growth is coming from the high-margin SKUs versus kind of mid-tier offerings? And with the current mix, would you adjust your long-term margin aspirations for that segment?

Well, we've -- so -- and we mentioned this in past quarters, we took some share over the past few quarters in our distribution business. So these are -- think of it as a retail shelf space. okay? So we've expanded our shelf space. A couple of years ago, we lost some, and we gained that back. And that is a very attractive business. The other area that I might mention is, look, the UWS solutions is one of the reasons why we thought this was such an attractive acquisition is because it allowed us to enter a part of the flooring market that serves warehouses and manufacturing facilities. So this is a growth area and has demonstrated some nice organic growth for us.

In our high-performing segment.

I'll make this my last question. I know you've highlighted the lower incentive compensation as a tailwind to margin across several segments this quarter. I know I think you've alluded that there will be some kind of normalization in the incentive compensation. But how should we think about from a sustainability and talent standpoint, are you structurally resetting some of that incentive programs? Or is this paying below as a tough year? Are you -- as you look at the labor market in your key regions, are you comfortable with the overall comp structure remains competitive enough to execute Project Fortify and your growth plans?

Yes. We believe our structure is fine. We just entered into a more difficult year, and we're not meeting our targets. So our compensation will be less this year, but we expect that to normalize into the future.

Our next question coming from the line of Julio Romero with Sidot.

Don, could you help us think about how you view the company's growth trajectory and opportunity set? And then also, how does the next leg of growth in your view for the company translate to any change in ROIC hurdles or metrics?

Well, first of all, we'll be -- the strategy that we're focused on hasn't changed. So we remain focused on becoming the economic leader in the target markets we serve, managing our portfolio and strengthening the core. So no change in how we think about where we're going to grow and how. The addition of UW Solutions certainly opened up new markets, new products that will enable us to grow faster. And as part of our managing portfolio strategy, we continue to look for new opportunities along those lines. So looking for acquisitions that will enable faster growth and at higher margins. We're going to talk a lot more about that on the next call when we talk about fiscal year '27.

Okay. Understood. I guess maybe can you dig into a little bit into the priorities that are more near term in nature? Obviously, you have Project Fortify expansion -- but any other kind of quicker turn wins or low-hanging fruit that you're looking to kind of achieve early on.

Well, delivering the results delivering our results will be critical. We're focused on delivering the year right now. I mean that's front and center.

Jose, I would just add. Yes, Project Fortify Phase 2 is probably the most important. But I would suggest that we're amping up AMS, again, as we think about how we're trying to drive cost structure down. Our best tool to do that is through the Apogee management system. So that's our -- that's going to be our tool to get there.

Yes. I mean, Julio. So AMS, I mean that's 1 of my observations for my first 60 days. The operational excellence and productivity improvements that we've been able to deliver through AMS are truly especially in the glass business, where we're seeing strength across the board, safety, quality, on-time delivery, you name it. And by the way, that was the birthplace of AMS. So they're leading the way, and it shows what we can do with the rest of the company. So it will be a key focus for us. And the last thing is, I think I mentioned a couple of times, but accretive M&A, it's front and center, too. We have a robust pipeline, and we're active.

Got it. And I guess just going back to my first question a little bit more, and it ties into your comment about robust M&A pipeline. Do you see any kind of Viewpoint difference with regards to yourself versus the last management team with regards to kind of kind of IRR hurdles or rate of return hurdles when you look at that M&A and kind of moving forward with that?

No, I don't think any difference in the in the financial analysis, but I would say, move faster. And with discipline, of course, but also faster.

Got it. That's helpful. I appreciate it. And then last 1 for me would just be on -- you gave some preliminary commentary on our fiscal -- you talked about you don't expect the tariff impact to reoccurring in fiscal '27. But any other kind of high-level thoughts with regards to how you see the possibility of revenue or profit growth in '27.

Yes. I guess I'll reiterate kind of in the process right now of our doing our we highlighted what I view are the key tailwinds and headwinds that we have in front of us, tailwinds being Project Fortify Phase I and the tariffs not repeating in the headwinds, of course, we've covered now several times with normalization of incentive comp. And certainly, aluminum prices will continue to be monitored as we go through the fourth quarter and as we scenario plan our AOP.

And I'm showing no further questions in queue at this time. I will now turn the call back over to Donald for any closing comments.

Well, thank you for joining us today. We look forward to sharing the fourth quarter and full year results in April, along with our fiscal 2027 outlet -- outlook, I hope you have a great week. Thanks.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation, and you may now disconnect.

Good day, and thank you for standing by. Welcome to Apogee Enterprises' Second Quarter Earnings Conference Call. [Operator Instructions]. As a reminder, this conference is being recorded for replay purposes. I will now turn the conference over to Jeremy Stephan, Vice President, Investor Relations and Communications, to begin. Jeremy, please go ahead.

Thank you. Good morning, and welcome to Apogee Enterprises Fiscal 2026 Second Quarter Earnings Call. On the call today are Ty Silberhorn, Apogee's Chief Executive Officer; and Matt Osberg, our Chief Financial Officer.

During this call, the team 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, which are available in the Investor Relations section of our website. 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 our press release and in the company's SEC filings.

With that, I'll turn the call over to Ty.

Thanks, Jeremy. Good morning, everyone. Our team deferred solid second quarter results with sequential improvements in sales and adjusted EPS in what continued to be a dynamic operating environment. Our teams remain focused on what is in our control, while leveraging strategic actions to reduce the impacts from tariffs during the quarter.

Net sales improved by almost 5%, primarily driven by both inorganic and organic growth in Performance Surfaces. Architectural Services recorded another quarter of net sales growth and sequentially grew their backlog by over $100 million. Glass performed as expected on both the top and bottom line with margins normalizing within our long-term range. Metals showed significant sequential top and bottom line improvement as our tariff-driven price increases went into full effect. However, we did see volume [indiscernible] as those prices took full effect, resulting in their sales and EBITDA being below our expectations for Q2.

Finally, cash flow in the quarter was an area of strength and a testament to our ability to generate cash in a dynamic macroeconomic environment.

Looking ahead to the remainder of the fiscal year, we are updating our outlook for both net sales and adjusted EPS to reflect developments since last quarter. First, we are lowering expectations for Glass volume and price as the competitive environment has not improved. A bid activity for our Glass business remains up versus last year. Price pressures are impacting their ability to secure volumes without giving up significant margin. Second, we are seeing higher aluminum costs that will put more pressure on pricing and volume in Metals. As they work to maximize EBITDA dollars, volume and market share, we expect their margins to drop, particularly in Q3 from their Q2 results.

While we are disappointed that these changes have impacted our guide for the year, we remain positioned to drive year-over-year net sales and adjusted EPS growth in the second half of the fiscal year. This will primarily be driven by growth in Performance Surfaces, which has been consistently strong, and we continue to see upside for that business long term. As we navigate the complexity of our current macroeconomic environment, we are also building a stronger Apogee for the future, and I'd like to highlight some examples that we believe are enhancing our ability to deliver sustained long-term value for shareholders.

Our leadership bench is strong as demonstrated by the recent changes for Metals and Services. UW Solutions continues to be on track to deliver the expected financial and synergy targets in addition to expanding our reach and broadening our product offerings. Our tariff mitigation efforts and Project Fortify 2 actions illustrate the strength and agility of our organization as we address a challenging macro environment. AMS continues to drive productivity improvements across our manufacturing footprint. And finally, our strong cash flow and balance sheet provide us with significant flexibility to continue to be active on M&A opportunities while managing through the current market dynamics.

We remain focused on acquisitions that fit our strategic and financial objectives, ones that will add differentiated products, leverage our core capabilities, provide accretive margin and growth rates while expanding our geographic reach. With that, I'll turn it over to Matt.

Thanks, Ty, and good morning, everyone. First, I'll begin with a review of the results for the second quarter and then follow with commentary on our outlook for the rest of fiscal '26.

Beginning with our consolidated results, net sales increased 4.6% to $358.2 million, primarily driven by $24.9 million of inorganic sales from the acquisition of UW Solutions. This was partially offset by lower price and volume in Glass and a less favorable mix in Metals. Adjusted EBITDA margin decreased to 12.4%. The decrease was primarily driven by lower price and volume, unfavorable mix and higher material, tariff and health insurance costs, partially offset by lower incentive compensation expense. Adjusted diluted EPS declined to $0.98, primarily driven by lower adjusted EBITDA and higher interest expense.

Turning to our segment results. Metals net sales declined slightly, primarily reflecting a less favorable mix partially offset by higher volume and price. Adjusted EBITDA margin decreased to 14.8% primarily driven by a less favorable mix and higher aluminum and tariff costs partially offset by lower incentive compensation expense. Our Services segment delivered its sixth consecutive quarter of year-over-year net sales growth with sales increasing 2.5%, primarily due to higher volume. Adjusted EBITDA margin decreased to 5%, mostly driven by project mix, partially offset by lower short-term incentive compensation costs.

Additionally, backlog for Services sequentially grew 16% to $792 million. For the Glass segment, as expected, net sales declined and adjusted EBITDA margin moderated from elevated levels in Q2 last year, primarily due to reduced volume and price and lower end market demand, partially offset by lower short-term incentive compensation expense.

Performance Surfaces net sales increased driven by the inorganic sales contribution from the acquisition of UW Solutions and strong organic growth of 18.6%, primarily from improved retail channel distribution. Adjusted EBITDA margin increased primarily driven by favorable price and volume.

Turning to cash flow and the balance sheet. As Ty mentioned, we generated strong cash flow in the second quarter with net cash provided by operating activities of $57.1 million compared to $58.7 million in the prior year. On a year-to-date basis, cash from operating activities was $37.3 million compared to $64.1 million a year ago due to lower operating cash flow in the first quarter. Our balance sheet remains strong with a consolidated leverage ratio of 1.5x, no near-term debt maturities and significant capital available for future deployment.

Turning now to our outlook for fiscal '26. As Ty noted, we are updating our outlook for both net sales and adjusted diluted EPS. We now expect net sales in the range of $1.39 billion to $1.42 billion and adjusted diluted EPS in the range of $3.60 to $3.90. This outlook includes an estimated EPS impact from tariffs of $0.35 to $0.45. Our updated outlook assumes an adjusted effective tax rate of approximately 27% and capital expenditures in the range of $35 million to $40 million. During the second quarter, the One Big Beautiful Bill Act was passed. We expect that this bill will not have a material impact on our effective tax rate but will provide a cash tax benefit that will primarily impact fiscal '26 with a smaller impact on fiscal '27.

Looking at the cadence of the year. As expected, we delivered sequential improvement on our financial results from Q1 to Q2. For the second half of the year, we expect year-over-year net sales and adjusted diluted EPS growth, primarily driven by Performance Surfaces. Additionally, we expect net sales to be generally evenly distributed between Q3 and Q4 and we expect Q3 adjusted diluted EPS to be similar to Q2 and then sequentially improve in Q4. Despite our solid performance in the second quarter, we are lowering our outlook for the second half of the year. This is primarily driven by increased pressure on volume and price in Glass and expectation of higher aluminum costs that will further challenge pricing and volume in Metals.

For Glass, in our previous outlook, we expected a sequential improvement in both sales and EBITDA in the second half of the year as compared to the first half of the year. We are now expecting second half Glass results to be more in line with first half results. We see a highly competitive market, putting pressure on price and our Glass team is working to maximize EBITDA dollar contribution while protecting their premium margins.

For Metals, during the first quarter, we saw aluminum prices subside, only to increase on average by approximately 20% during the same quarter, and we are incorporating the expectation of higher aluminum costs in our outlook for the remainder of the year. The impact is more pronounced in our longer lead time products, where we have less ability to raise prices to match current cost trends. For our shorter lead time items, we are also expecting increased pricing pressure in the second half of the year with competitors seemingly less likely to raise prices. This is putting more pressure on volume and margins as we work to maximize margin dollars, in a more competitive pricing environment.

We also experienced higher-than-expected health insurance costs in the second quarter and are forecasting that trend to continue for the second half of the year which is a new headwind in our outlook as compared to last quarter. Despite the macroeconomic challenges, I'm pleased with the momentum generated through the first half of the year and our outlook for year-over-year growth in the second half of the year. Additionally, our strong cash flow generation and healthy balance sheet position the company well for sustained future success. With that, I'll turn it back over to Ty for some concluding remarks.

Thanks, Matt. The first half of our fiscal '26 has been challenging, and I'm very proud of the work the team has done, navigating challenges and further positioning the company to drive long-term shareholder value. As we look ahead to the second half of the fiscal year, despite macroeconomic headwinds, we are positioned to drive year-over-year net sales and adjusted EPS growth in the second half. While Metals and Glass faced challenges on volume and price, both businesses are in stronger positions than they were the last downturn. As an example, even with sales for Glass being down significantly year-over-year, we expect that they will finish the year in the mid-teens for EBITDA versus mid-single-digit margins the last downturn. And we continue efforts to build our M&A pipeline to add strategic capabilities to enable long-term growth.

In closing while the macro creates challenges near term, we remain focused on executing our strategy, investing to strengthen the company and building a more resilient portfolio that delivers higher growth and higher margins. With that, we will now open the call to questions.

[Operator Instructions] Our first question comes from the line of Brent Thielman from D.A. Davidson.

Yes. I guess, maybe just the first question focused on Performance Surfaces. Could you sort of expand on the organic growth that you saw through the quarter. How much might be related to internal initiatives around distribution relative to just market growth behind that. I'd be curious around the organic growth profile in that segment?

Yes, Brent, it's a great question. So if you look at kind of ex UW Solutions, the old LSO, that core part of the business, that's where we saw probably the strongest growth within the portfolio. And it was really -- if you remember last year, they did lose some distribution. Think of it as shelf space at some of the retail outlets. They've regained that, and they've also picked up momentum at adding some additional products. They're also leveraging some cross-selling opportunities for overlapping customers between the UW solutions business, in the original core old LSO business. So that's giving them some momentum in that space.

And then within UW, while it's tracking as expected, we're seeing the flooring side of that portfolio actually outperformed, and we do expect that to continue based on awards and order rates.

And Ty, maybe just following on that, what's moving the needle on the flooring side of that business?

I'd say a couple of things. So there remains demand for that product as manufacturing and distribution [indiscernible] warehouses look to bring more automation in. So that product's best value proposition is when a distribution center is going to put in AGVs, automated guided vehicles, robotics to move inventories around. So we're seeing a push there. We are actually seeing a pull of that product into Europe based on a large global e-commerce retailer that has had tremendous success with that product and is actually asking us to pull that business into Europe as they build out some additional distribution centers and retrofit existing ones with mezzanines. So those are things that are not only feeding that business right now, but give us confidence that, that's going to continue over the next few quarters.

And then on the Services backlog uptick here in the second quarter, maybe sort of a similar question, Ty. Is this indicative of maybe some different outreach by the business into new markets? Is it reflective market conditions? Maybe you could just expand on that increase in backlog quarter-over-quarter.

Yes. It's a combination of both. I would tell you what drove the largest portion of that backlog growth. [ We're project ] in the Northeast. So that part of the country has been relatively soft for a couple of years. So we alluded in the last call, we were seeing a pickup in bid activity. The Northeast was an area where we saw that picking up materially in terms of activity, and the good news is that team has been able to bring some of those projects across the finish line.

The work that the team has done to expand out West, that continues as well. So the work that they have been able to put sales office and teams on the ground in the Western United States is also helping them continue to build out that backlog and take share. That business, when we look at that result in the quarter, while it is a signal, maybe some positive things that are coming. I think it's a testament to what the team has done in this environment to take share in what still is a relatively soft market.

Our next question comes from the line of Julio Romero from Sidoti & Company LLC.

On the Glass segment, the lowered expectations for Glass in the second half, I guess, you're tempering the sales guide there. It sounds like the competitive environment has gotten a bit tougher. Do you still kind of expect to post margins in the targeted EBITDA margin range for the next 2 quarters? And then secondly, what's your sense of how long the softness should or could persist?

Yes, Julio, good question. So as Ty and I have talked about the Glass segment and just more broadly about how we think about our longterm margin ranges. I think we said in years that we've got more top line challenges, you look to the bottom end of that range and [indiscernible] you got some tailwinds, you look to the top end of that range. I think this is a great example of even though they've got some headwinds on the top line, as Ty said, we're expecting mid-teens.

And yes, I would say that expecting mid-teens for the year and for the next couple of quarters. And I think that's a testament to the shift to premium strategy and what we've been able to build in that business and just the quality of the business that we have. And then we're also very hopeful as we're looking at some of the the headwinds that we have to not destroy what we've built and to be really selective about how we pursue other volume opportunities to still preserve that margin. So I think that it's definitely looking at that mid- to high teens for the next couple of quarters in the year.

Yes. Julio, I'll just -- maybe I'll add in here that as we worked with the team, we talked about last quarter staying on top of the teams in terms of what's driving their sales pipelines, et cetera. The bid activity in Glass continues to be up over year-over-year. So that's a positive sign. The negative that really started to show in the quarter, and we think now is going to continue in the back half is price pressures from competition. So even though bid activities, we're seeing some pickup, the aggressiveness of competition to win some of those jobs is putting downward pressure.

We worked with the Glass team, and they've been very thoughtful. They've done a lot of work to really reposition the premium side of their portfolio. And while they are giving some price to win business with premium products, they are really working to preserve a pricing floor on those product offerings to maintain those margin levels. So I guess you could look at it and say, would they have had the potential to maybe step into some more sales? Probably, we also looked at that and said, you're going to take a pretty hefty market and they are concerned about kind of resetting at a much lower price rate for those premium products.

So they're navigating this, I think, the right way. They want to maximize the EBITDA dollars. They want to win the business that they can, but they don't want to destroy the 2-plus years of work they've done to really reposition and build out the premium side portfolio.

Very helpful answer there. And then kind of similar, it sounds like you're seeing some similar dynamics within the Metals segment, although it sounds like it's maybe a little bit more cost pressure than maybe competitive pressure there. And can you maybe just speak to how much of the lower guide for Metals in the second half is kind of based on cost pressure versus kind of a decision on your end to maximize EBITDA dollars and share in that segment?

Yes, I would say they're connected, right? So as we saw in the first quarter, we started to see price -- aluminum costs start to abate a little bit from the rise that they've been on. And then during the second quarter, we saw those step up on average now about 20% compared to the first quarter. So you've got that element of higher costs. And as you look at the right moments to take price, you're all measuring okay, how am I going to fare in the market against my competition with those prices and am I going to be able to maintain volume, right?

So there's kind of that triangle of the cost, the price and the volume that you're trying to balance out, as we've said, to try and maximize our EBITDA dollars. So I would say the pressure is mainly coming from the higher aluminum costs, then we're trying to work through the price and volume impacts of what we want to do in the market, what our competition is doing in the market, but I think it's being generated. That pressure is being generated by the higher higher aluminum costs that we're experiencing now and we expect for the second half of the year.

Yes. And I'll add -- let me add into that, Julio, as we looked -- it's a little bit there's similarity there with Glass, but a little different in that with the price pressure. So if you look -- you can go out and look at aluminum spot pricing, we saw about a 20% increase from the beginning of our Q2 through the end of Q2, and that's stabilized for now, but we're looking at our outlook and factoring in what we need to do there in terms of price and how it might impact us from margin.

Metals at the same time, as I said in the opening, we did expect them to do better on top and bottom line and they didn't. And part of that is our second round of price increase. Remember, there's a 25% tariff in February, second 25% tariff in June. That really started to flow through pricing for aluminum on the spot price basis in June, July and August. As we push through that second round of price increases, we saw order volumes starting to hit. And [indiscernible] a balance holding on to some share, regaining some share from some of the operational challenges, again, trying to maximize EBITDA dollars. But with that rise in aluminum and some of the longer-lead products that are in the portfolio. They're going to have to swallow some higher costs in Q3, which is why we expect them to step backwards on margin and have some margin erosion in Q3.

Got it. Very helpful there. Last one, if I could, is just on Performance Surfaces. It sounds like you're seeing some good momentum within the UW within both legacy and UW. But within UW, can you maybe speak to where the mix of flooring stands at percentage of UW or maybe give us a sense of where that mix has -- how the mix has evolved since UW has been under the Apogee umbrella?

Yes. If you recall, when we announced the acquisition, we said it was a little less than half of the portfolio, given the healthy double-digit growth rates, it's trending to be comfortably over half of the portfolio, and we think that trend is going to continue over the next several quarters.

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

My first question is on the customer shift. Across your businesses, have you seen any shift towards smaller or nontraditional engineering-only projects? And if there are any kind of marginal delta differences between those and the historical businesses?

Yes. I think you've seen that with the increased competition in the market and some of the lower levels of activity, you start to expand the reach and what you want to look at. And particularly, I would say, in our Glass business, we're expanding the scope of where we can participate and how we can pick up some margin volume dollars. So definitely looking at it.

I think it's a more competitive environment, across the board. And so as you look at those, typically, they're lower-margin projects. But like we said, we're trying to create margin dollars and specifically in our Glass business, we're trying to protect the premium products that we've built over the past 2.5 years, protect some of the margins there. So it's a job-by-job evaluation of where we will participate, but we're trying to expand our reach to see where we can strategically pick up some volume dollars.

Yes. I think as Matt said, Gowshi, it's really within Glass and Services, if you look at their average project size, that has come down in the last 18 months as they work to maximize volume as best they can. So they're going downstream a bit. A lot of those projects, whether it's glass or curtain wall through architectural services, tend to be less complex, which means it opens up to some more of the smaller regional players and that does put some price pressure to win those jobs.

And on the downside of the EPS, if there is continued end market softness maybe slower than expected Fortify realization and no additional tariff relief. What is the realistic downside for FY '26? And what could be the levers you could pull to defend that flow?

Yes. So we put out a range of $3.60 to $3.90. So that's what we're looking at in terms of our analysis. Some of the big things that can impact that would be, continued upward cost pressure on aluminum. We've factored into the second half of the year, an expectation that aluminum costs basically stay where they are today. So if things worsen from there, that can put pressure on it. And we're doing things like within our Project Fortify Phase 2, we're looking at cost actions so that we can be proactive and responsive to what we're seeing and make sure we're doing the right things to control costs at a corporate level to offset any of the further pressure we might be.

And just for model purposes, on the tax reset, I know you're modeling for 27% for the full year assumptions. Was this driven so far for Q2 to -- for the rest of the year, how are we supposed to model or think about the tax rate setup?

Yes. So I mean, obviously, we had a higher tax rate in Q1. We had a much lower operating income. So we guided for 27% for the year. I think that tax rate in Q3 is pretty close to that and then it's down a little bit in Q4 and you end up at close to 27%.

And my final question, on the Surfaces that we are modeling 23% adjusted EBITDA margins for multiple quarters now. How sensitive is that segment to a potential slowdown? Or is there any inventory correction in the channel partners in the next year?

I think if you look at historically, Q2 and Q3 on the retail side is really when the business flows and we've got decent visibility in that business 1 or 2 months out, and we're a month through our Q3. So I think any slowdown -- dramatic slowdown that they might see on the retail side of that business is probably a Q4, Q1 and it's more likely Q1 as folks reset inventories after the holiday season.

So I think what might drive any shifts in our outlook for that business is probably just more of a mix as opposed to a dramatic fall off on the retail side. Reminder on a large portion of that business, it's really targeting kind of upper middle class upper income households, which are a little less susceptible. And I just listened to the spending report on the drive-in and that part of the consumer market actually spending was holding up think the number is about 4%. So that's kind of a positive reflection for how that business might look as we work through the end of our fiscal year.

At this time, I'm showing no further questions. I would like to turn the conference back over to Ty Silberhorn for closing remarks.

Thanks, Gigi. Thanks for joining our call today. We look forward to updating you on our progress in a few tenets. Hope everyone has a great day.

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

Good day and thank you for standing by. Welcome to the Q1 2026 Apogee Enterprises Earnings Conference Call. [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, 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.

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 3 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.

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 barely 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 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 effect -- 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.

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 Instructions] Our first question comes from the line of Brent Thielman from D.A. Davidson.

I want to start just if you could elaborate on the Glass business. You mentioned revenue pipeline seems to be picking up. Love to get maybe more of a -- any more detail in terms of what you're seeing there that's giving you the confidence for maybe a pickup here in the second half of the year?

Yes. As we look at the work the team is doing, when we look at that business, pretty good visibility 6 months out. It starts to get a little fuzzy as we get 9 and 12 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 shift to premium, recognizing that 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.

And the productivity they continue to drive in their facilities allows them to do that and still effectively stay within their margin range. So we're -- we have a regular rhythm now where monthly and quarterly, we're going deep with each of the businesses on their sales opportunity pipelines. And 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.

Yes. I'd just add to that, Brent -- this is Matt. I'd just add on that as we've talked about before, we're really working with that team and all our teams to look at how they're trying to build EBITDA dollars, right, and so titrating price and opportunities in the market. Like Ty said, they're looking at a a wider scope of opportunities and trying to get price right and stay within our long-term margin range to make sure we can get -- generate the most EBITDA dollars that we can.

And in the Q3 -- just clarify it, too, it's a Q3, Q4. We think the Q2 still looks a lot like Q1. But as they're seeing award rates coming through, we see the growth in top and bottom line picking up in Q3 and Q4.

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?

Yes. I'll start and Matt can throw some color on it. I think the first thing to point out is remember, Metals and Services have got some big headwinds with respect to tariffs. And so as they recover and our mitigation efforts, it's fully into place as we get into the second half. They've got a hole they got to dig out of in Q1 and Q2. So I think it's likely. We'd be pleased if they got to the bottom of those target ranges. So Metals was 13% to 18% adjusted EBITDA, Services is 8% to 10% adjusted EBITDA. I think because of the whole they're digging in the first half, they'll struggle to get to the bottom of that range, but that's kind of what we're hopeful and expecting as we look out.

As Matt said on Glass, we revised them. We want to grow EBITDA dollars in that 15% to 20%. So there -- because of the types of jobs they're chasing, again, we're probably -- they're probably in the range but towards the bottom end of the range. And then Services, depending on mix, I mean, they're definitely in the range. It's a question of they -- are they closer to 20%? Or are they in the mid-20s from an adjusted EBITDA based on how the mix plays out? But again, they're gaining confidence in the organic growth outlook for the combined businesses, which we think will start to show up in Q2.

Yes. The only thing -- I'd echo what Ty said. The only thing I'd add on is, as we said -- or I said in my remarks, if you look at the results for Services for the quarter from a margin perspective, they would have been well within the range if it were not for the impact of tariffs and showing margin improvement year-over-year. And so I'd just echo that does weigh on both Services and Metals this year from a margin perspective.

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?

Yes. It's -- 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.

Our next question comes from the line of Julio Romero from Sidoti & Company LLC.

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?

Yes. Let me start and, again, Matt can weigh and add some color here, too. We saw month-to-month sequential improvement through the quarter. So the -- as we went through the quarter each month, we started seeing operational improvements carrying through. So if you remember, Q4, a big challenge they had on some operational issues and consolidation in the footprint that we had done the year before and scaling that up effectively. We leaned hard into that in Q4 and kind of said, "Let's take our lumps and move to get this behind us." So we saw that starting to pay dividends as we went into the second and third month.

A core part of that business is really driven by their ability to have shorter lead times and have high on-time complete percentages. They had not been acting on that in Q4 for sure. And even towards the end of Q3, they started having some of those issues. So that team -- and I think our customers would tell us, they are not back to where they should be and where they historically have been with those service capabilities and lead times, but they are getting better each month.

As we've seen them improve on lead time and that on-time completeness, we are seeing some sales trickle back, too. So they were building their weekly sales order rates. We're building back up. Now I think some of that is a little bit of market, but probably a larger percent of that is they're doing what they say they should be doing to the customers, and they're regaining some customer confidence that's throwing some additional orders back their way.

Yes. The only thing I'd add to that, Julio, is if you look at their sequential trend, sales and EBITDA margin 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 at improved sequential Q1 to Q2 for them.

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

Yes. That's our expectation, yes.

Yes.

Okay. Great. And wanted to ask you about Project Fortify Phase 2. I think last quarter -- based on how I kind of took away last quarter, I don't think there was much savings expected from Phase 2 in the earlier part of the year. Just wondering if that held true or were you able to start seeing some of the Phase 2 savings in the May quarter?

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.

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

We did. In Q1, we said it was $0.45 to $0.55. And we said a lot of that is first half-weighted. And 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.

Sorry, I'm kind of misunderstanding that one part. So the first quarter, what was the impact for 1Q?

So we said in Q4 -- in our Q4 call, we said the total annual impact for tariffs would be $0.45 to $0.55. We've now updated that range for the full year to be $0.35 to $0.45. And in both of those cases, we said the primary impact of that happens in the first half of our year. So some of that, we actually saw happen in Q1 as expected, but we saw it come in favorable to our original estimate, and we do see some favorable trends happening in Q2. That's why we took the annual range down and made it more favorable.

We didn't break it out, Julio, to give specific quarterly guide on that.

Yes. That's what I what I'm getting to. So the -- still a little bit expected in second quarter perhaps in that full year guidance?

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.

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

Can you hear me?

Yes.

Yes.

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

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.

Okay. Got you. [indiscernible] to say it. On 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?

I would -- Gowshi, I would characterize it more as it is reflective of the softness that's in the market right now. The Services team obviously wants to protect margin. But like we said with some of the other businesses, we've encouraged them, "Hey, as long as you're in that range of 8% to 10%," and we've even greenlighted some stuff that's a little weaker than that because we're looking at it on a full year basis to make sure that the volumes have flown -- are flowing through. So I think it's more a reflection of softness.

There's still choppiness. So we've had a couple of weak quarters of awards flowing through. There's still the possibility of all of a sudden, we have a big quarter with a bunch of awards hit. And if you heard my comments about Glass being a little more creative and willing to look at jobs of different sizes, our Services team is doing that as well. So they've been actively quoting jobs that are typically smaller things that 18 months, 24 months ago, they would have never gone after because of the size. They're confident in their ability to execute on those because of some of the productivity work that they've done in their facilities. And they've always had pretty strong productivity in the field when they're doing the installation work and better leveraging their engineering resources to support that work and which was part of the reason that we were able to, again, tough decision, but be able to shut Toronto to mitigate the tariff impact and consolidate that into our 2 U.S. facilities. They are also pursuing jobs that leverage their engineering and installation services but does not require them to fabricate the curtain wall. So they are looking at different ways, different avenues for them to grow their revenue and still deliver good margins and EBITDA dollars to the bottom line.

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?

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 that -- 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.

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?

Let's say -- I think everyone thought M&A was going to take off screaming in the first half of the calendar year. But then with some of the larger macro issues, the tariff environment, interest rates staying elevated, that has been slow going. So as we look at that, we've stayed focused on the strategic targets that we've identified over the last 2 years. So we continue to work that pipeline. So you not only have to have a willing buyer, you have to have a willing seller. So I think sellers have been a little bit more cautious about wanting to make sure that they enter the market, and they're still going to get a good valuation.

I wouldn't say we've seen a step down in multiples with the things that have come to market or have at least kicked the tires that come to market, but there's some reasonableness in those valuations. And I think right now, strategic and a little bit more of a benefit because of the interest rate and the leverage models that private equity has, private equity is still sidelined a bit.

So we're active there. There are several things we like in the portfolio. We've taken, I would say, maybe a little bit broader look just in knowing the tariff environment has shifted things and so taking a little bit broader look on what that impact might have on international. We do have some international export sales. So we haven't changed our view on our target pipeline. We just continue to work the pipeline.

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

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.

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