Quanex Building Products Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
March 8, 2024

There are 7 speakers on the call.

Operator

Good day, and thank you for standing by. Welcome to the Q1 2024 Quanex Building Products Corporation Earnings Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session. Please be advised today's conference is being recorded.

Operator

I would now like to hand the conference over to your first speaker today, Scott Zielke, Senior Vice President, CFO and Treasurer. Please go ahead.

Speaker 1

Thanks for joining the call this morning. On the call with me today is George Wilson, our Chairman, President and CEO. This conference call will contain forward looking statements and some discussion of our non GAAP measures. Forward looking statements and guidance discussed on this call and in our earnings release are based on current expectations. Actual results or events may differ materially from such statements and guidance, and Quanix undertakes no obligation to update or revise any forward looking statement to reflect new information or events.

Speaker 1

For a more detailed description of our forward looking statement disclaimer and a reconciliation of non GAAP measures to the most directly comparable GAAP measures, please see our earnings release issued yesterday and posted to our website. I'll now turn the call over to George for his prepared remarks.

Speaker 2

Thanks, Scott, and good morning to everyone joining the call. Before I start my discussion on the quarter, I'd like to take a moment to publicly thank Bill Griffiths for his many years of dedicated service to Quanix. Bill began his career with Quanix as an independent director in 2,009. When the Quanix CEO resigned in 2013, Bill was asked by the Board to take over as Chairman and CEO, and he held that role for more than 6 years. He retired as CEO in January of 2020 and then served as Chairman for the next 4 years.

Speaker 2

Bill was instrumental in transitioning Quanix from a largely commoditized metals company into a true building products manufacturing company. His focus on developing a culture of safety, continuous improvement and profitable growth positioned us well for the success we are realizing today. Thank you again, Bill, for your commitment, dedication and service to Quanix and its employees, customers and shareholders. We wish you and Iris all the best in retirement. I'll now move on to my prepared remarks about our Q1 performance and our current outlook.

Speaker 2

Overall, the quarter played out as expected. Revenues were down year over year as markets reverted to a more normal seasonal pattern and customer inventory levels declined as lead times in supply chains have improved. In addition, automatic index pricing mechanisms had a negative impact on revenue versus the prior year as raw material costs have declined. Even with lower demand levels, we were able to realize margin expansion on a consolidated basis, mainly due to solid operational performance, holding discretionary pricing, lower stock based comp expense and lower interest expense. We were very pleased with our operating cash flow generation, which enabled us to continue to pay down debt in the quarter where we typically draw on our revolver.

Speaker 2

With respect to the overall macroeconomic environment, we continue to believe we will see an uptick in demand in the second half of the year. In North America, new housing starts data has shown improvement and optimism is building around the prospect of lower interest rates later this year. If and when the Fed does take action to lower interest rates, we believe demand for our products will improve as customers gain confidence and choose to spend more money on housing. In Europe, we believe market improvements will occur at some point, but will lag North America due to the ongoing wars in Ukraine and Gaza and continued pressure on energy costs in these regions. But regardless of the demand equation, we have shown over the past 2 years that the Quantix operating model is able to react quickly to produce favorable results.

Speaker 2

In addition, the long term underlying fundamentals for residential housing continue to be very positive. Globally, inflationary pressures have been mixed. Starting with labor costs, we have seen a slowdown in the rate of wage inflation as hiring in most markets have slowed. For the sourced materials that are most impactful to Quanox, we are seeing a stabilization in pricing and supply for aluminum, steel and resins. We are still seeing input cost pricing pressures for our films and engineered adhesives and some of the chemical feedstocks.

Speaker 2

For our cabinet component products, we are now starting to see upward pricing movements for some of the hardwood species we purchase as lumber mills have reduced capacity in the market. Finally, from a logistics perspective, we have seen an increase in international shipping costs due to the disrupted shipping lanes in the Middle East. As we look forward to the rest of this year and into next year, I'm still confident that we are well positioned to meet expectations and continue our track record of positive performance. Our operations and supply chain teams are focused on servicing our customers and performing at a high level and are doing a fantastic job of generating operating cash flow. From a growth and strategy execution point of view, our balance sheet is strong and ready to support growth projects as they arise.

Speaker 2

We continue to identify areas of opportunities to execute on our profitable growth plan, both organically and inorganically. Despite some short term macro challenges and the uncertainty caused in an election year, we are on track to achieve all of our objectives. I will now turn the call over to Scott, who will discuss our financial results in more detail.

Speaker 1

Thanks, George. On a consolidated basis, we reported net sales of $239,200,000 during the Q1 of 2024, which represents a decrease of 8.7% compared to $261,900,000 during the Q1 of 2023. The decrease was mostly attributable to softer market demand and lower pricing in North America, mostly in our Cabinet Components segment as pricing held up in our Fenestration segment. Net income increased to $6,200,000 or $0.19 per diluted share for the 3 months ended January 31, 2024 compared to $1,900,000 or $0.06 per diluted share for the 3 months ended January 31, 2023. After adjusting for one time items, net income decreased slightly to $5,800,000 or $0.18 per diluted share for the quarter, compared to $6,100,000 or again $0.18 per diluted share for the same period of last year.

Speaker 1

On an adjusted basis, EBITDA for the quarter decreased to $19,300,000 compared to $20,500,000 during the same period of last year. However, we were able to realize margin expansion of approximately 30 basis points on a consolidated basis. The increase in reported earnings for the 3 months ended January 31, 2024 was largely due to a decline in raw material costs, a decrease in stock based compensation expense and lower interest expense. Now for results by operating segment. We generated net sales of $148,000,000 in our North American Fenestration segment for the Q1 of 2024, a decline of 3.3% compared to 153,000,000 dollars in the Q1 of 2023, driven by a decrease in volumes due to softer market demand.

Speaker 1

We estimate that volumes in this segment declined by about 3% year over year with pricing holding up relatively well. Adjusted EBITDA decreased slightly to 13 $7,000,000 in this segment compared to $15,000,000 for the same period of 2023. Our Quanex custom mixing business, formerly LMI, continues to perform well and we're looking for ways to expand this business, both organically and otherwise. Our European Fenestration segment generated revenue of $49,400,000 in the Q1, which represents a decrease of about 10% compared to $55,000,000 in the Q1 of 2023. We estimate that volumes declined by approximately 12% year over year in this segment with pricing up approximately 1% and positive foreign exchange translation impact of about 2%.

Speaker 1

Adjusted EBITDA increased and came in at $10,000,000 for the quarter compared to $9,700,000 in the Q1 of 2023. Pricing held up nicely during the quarter and we continue to perform well from an operational standpoint, which led to adjusted EBITDA margin expansion of 250 basis points year over year. Normalized buying from our European spacer customer supported results as the inventory rebalancing projects that impacted the business last year are no longer present. Continued improvements in operational metrics combined with sourcing initiatives and pricing carryover all contributed to realizing margin expansion in this segment. We generated net sales of 43,100,000 dollars in our North American Cabinet Components segment during the quarter, which was 21.1% lower than prior year.

Speaker 1

This decrease was driven by lower volumes and lower pricing for hardwoods. We estimate the volumes declined by about 12% in this segment year over year with the remainder of the revenue decline versus Q1 of 2023 due to a decrease in price, largely related to index pricing tied to the decline in hardwood costs. Adjusted EBITDA was negative for the quarter in this segment compared to $1,700,000 in the Q1 of 2023. Positive operational execution is currently being masked by low volume, but we're hopeful for a rebound in this segment once consumer confidence is restored and the R and R market picks up. Moving on to cash flow and the balance sheet.

Speaker 1

Cash provided by operating activities was $3,900,000 for the Q1 of 2024, which represents an increase of 22.9 percent compared to $3,100,000 for the Q1 of 2023. However, free cash flow decreased for the quarter due to higher CapEx spend compared to the Q1 of last year. Our balance sheet continues to be strong. Our liquidity keeps improving and our leverage ratio of net debt to last 12 months adjusted EBITDA was unchanged versus last quarter at 0.1 times as of January 31, 2024. Excluding real estate leases that are considered finance leases under U.

Speaker 1

S. GAAP, we are net debt free. As George mentioned, we were able to repay $5,000,000 of debt during Q1, which isn't normal since we are typically a net borrower during our 1st fiscal quarter due to the seasonality of our business. We will remain focused on generating cash and paying down what little debt we have outstanding on our revolver. We will also maintain our focus on growing the company through organic, inorganic and innovative growth opportunities as they arise, while continuing to preserve our healthy balance sheet.

Speaker 1

As always, the goal is to create shareholder value. As referenced in the earnings release, based on conversations with our customers, recent demand trends and the latest macro data, we're now comfortable providing official guidance for fiscal 2024, which is as follows: net sales of approximately $1,100,000,000 adjusted EBITDA of $145,000,000 to 150,000,000 dollars depreciation and amortization of approximately $44,000,000 to $46,000,000 SG and A of $128,000,000 to $130,000,000 interest expense of $3,500,000 to $4,000,000 a tax rate of 20% and CapEx of $40,000,000 to $45,000,000 In addition, our guidance for free cash flow is $85,000,000 to $90,000,000 for fiscal 2024. From a cadence perspective, for the Q2 of this year versus the Q2 of last year, we expect revenue to be flat to down 2% on a consolidated basis. By segment for the Q2 of this year compared to the Q2 of last year, we expect revenue to be up 2% to 4% in our North American Fenestration segment, down 2% to 4% in our European Fenestration segment and down 11% to 13% in our North American Cabinet Components segment. On a consolidated basis, adjusted EBITDA margin is expected to be down 100 basis points to 150 basis points in the Q2 of 2024, again compared to the Q2 of last year.

Speaker 1

Operator, we are now ready to take questions.

Operator

Thank you. Our first question comes from the line of Julio Romero from Sidoti. Your line is open.

Speaker 3

Hey, good morning guys. Good morning. Could you speak to hey, good morning. Could you speak to what you're hearing from the OEM customers in regards to repair and remodel trends and just talk about what you're hearing as to what can maybe improve demand in the second half of your fiscal year?

Speaker 2

Yes. The International Builders Show was last week and we spent a lot of time talking to many of our different customers and others throughout the segment. And I think the sentiment right now is that the back half of the year will see a pickup. We've already seen new construction data start to show some improvement, but everyone's convinced that the R and R demand is there, it's pent up and that with any movement in interest rates on the downward side, which everyone believes will happen at some point at the back half of the year that you'll see both new construction and R and R see an uptick. R and R will probably lag a little bit to the new construction data, but everyone was extremely optimistic on what they see at the end of this year and going into next year.

Speaker 3

Got it. That's very helpful there. And then maybe can you speak to the guidance and what's embedded for the full year across the segments from a margin perspective? And do you see kind of the trajectory playing out for the full year across the 3 segments?

Speaker 1

I mean, we've mentioned a couple of times now that on a consolidated basis, margins will be pressured a little bit year over year 2024 versus 2023. But as a cadence through the year, we expect margins to improve as the year progresses, which is typical seasonality in our business. Volume leverage, operating leverage improves throughout the year and we expect the same this year. Depending on the quarter, I mean, we gave some cadence for 2Q, we'll do the same for 3Q and 4Q as the year progresses. But as you're modeling, you can expect margin improvement throughout the year.

Speaker 3

Okay. Really helpful there. And then, Scott, the revenue guidance you gave for the North American Fenestration segment of up 2% to 4% year over year in the Q2 is a pretty nice step up sequentially from Q1. Can you maybe just talk about what's embedded there from a price volume perspective?

Speaker 1

Yes. I mean that's again typical seasonality. We start seeing a pickup towards the 2nd part of the second quarter. Price volume, I mean that volume is improving, that's most of it. We've been able to hold on to price for the most part.

Speaker 1

We do expect some pricing pressure in the Fenestration segments both here and in Europe. However, volume should start to improve, which will obviously help revenue and margins.

Speaker 3

Okay, great. I'll pass it on and circle back with any follow ups. Thank you.

Operator

Thank you. One moment for our next question. And our next question will come from the line of Reuben Garner from Benchmark. Your line is open.

Speaker 4

Thank you. Good morning, everybody. And congrats Bill on your retirement, hope you enjoy it. And George, congrats on your move as well. So I guess to start, it looks like a continuation of a trend that we've seen in the last several quarters is what's kind of implied in your guidance where we'll see continued gross margin expansion despite some volume headwinds and it looks like some pricing headwinds as well, but we're deleveraging on the SG and A line.

Speaker 4

Am I thinking about that the right way, 1? And 2, is that largely driven by kind of the mix shift that you're seeing where cabinets is a lower gross margin business and underperforming at the moment or are you still price cost positive? Just kind of walk me through how you get to those assumptions.

Speaker 2

So I'll give some general guidance there, Ruben. And first of all, thanks for your kind words for both Bill and I. As we progress through the year, the improvement in margin is very tied to the uptick in volume. As you know, some of our processes are continuous type of extrusion process. So volume does play a big role in the gross margins of our business.

Speaker 2

I think we'll continue to see that and feel very comfortable. I think we're confident that we'll start to see some improvement in the volumes as well on the cabinet side of our business. We're starting to see a little bit of that. And again, as consumer confidence grows, that's an area that tends to be focused on kitchen and bath remodels. So we're pretty confident in the ability of all of our segments to grow in terms of margin.

Speaker 2

The one that will be most pressured is Europe and that's because of the continued softness in that market as well as some pricing pressure that they continue to face.

Speaker 4

And I guess on that note, George, the cabinet side, I guess the optimistic outlook that you could see that business turnaround. It's let me put it this way, the Fenestration business has definitely outperformed over the last year or so. What do you think is driving that? Is it simply was there pull forward demand from COVID for cabinets and not necessarily in windows? Is there something else going on?

Speaker 4

Why do you think that the cabinet space is underperforming fenestration?

Speaker 2

I do think that there was some of the COVID pull forward, obviously. I think a lot of people focused on some remodeling in their house when you're constrained to being indoors or at least the work from home. I think we did see a lot of that. I think that that type of product tends to be a little more discretionary on the R and R side versus the fenestration. If you're at a point where you have to replace a window or a door, you're effectively going to do it.

Speaker 2

It's not as much as a discretionary spend. To some extent, it is, but not as much as the cabinet. So I think you're right, there was a pull forward effect and there is some differences in terms of the demand, Fenestration versus Cabinets in that regard.

Speaker 4

And can you point to I know you guys check the industry data pretty closely like have you been outperforming in Fenestration because of some of your internal initiatives and maybe there's less of that in cabinets to be able to kind of outperform the underlying market at this point?

Speaker 2

In our mind, I think we worked hard to go get some share. I think performance during the COVID period, having in sourced and having a supply chain that's, what I would say, been very structured to protect our customers from shortages and outages have helped. The duplicity of processes across multiple facilities continues to help. So I think we've been able to take advantage of that aspect. Overall, though, we may be a little ahead of some of the peer groups, but generally in line.

Speaker 4

Okay, great. Good luck guys. I'll pass it on there.

Speaker 1

Thanks. Thank you.

Operator

Thank you. One moment for our next question. Our next question comes from the line of Steven Ramsey from Thompson Research Group. Your line is open.

Speaker 5

Hi. This is Catherine Thompson calling in for Steven today. And Bill, best of luck for many years and best of luck in your next chapter. Following up just on a few questions today, just within the U. S, all the components grew except for U.

Speaker 5

S. Administration. Could you discuss why U. S. Non administration sales continue to show solid growth and the drivers there and overall contribution to your guidance?

Speaker 2

So the markets that are non fenestration, one of the larger ones, we participate in the fencing market. We also sell products into the solar market, which has had some pretty good demand and tends to be a little bit better on the profitability And then in addition, our QCM, the acquisition of LMI has been extremely helpful and a great addition to our group and that continues to be focused on many industries outside of Fenestration. It's a very diverse set of markets it serves and then they performed very strong within our Q1. So as you know, part of our strategy has been to both bolster and build out our Fenestration product portfolio as well as expand and grow into adjacent markets. And I think what you're starting to see is the realization of that strategy and we'll continue to build on those on a go forward

Operator

basis. Okay.

Speaker 5

Thanks. And then following up on earlier conversation just on residential R and R activity. Could you clarify what parts of or at least talk to the parts of the business or total exposure that is to existing home sales versus new?

Speaker 1

So on a consolidated basis, we're 65%, 70% weighted to R and R. Our European Fenestration segment and our North American Cabinet Components segment is definitely more weighted than that in total.

Speaker 5

Okay, perfect. And then final question, in the North American segment put forward 9.3 percent EBITDA margin, so down 30 basis points year over year and all from kind of like mid teens results in the prior three quarters. Do you and I know you talked about it earlier, but just kind of against that backdrop, do you expect any to show similar step up prior like you did in the previous year over the next quarters and getting back more specifically to that low to mid teen range? Thank you.

Speaker 1

Yes. And that has a lot to do with the seasonality of our business in that low watermark is typically 1st quarter with a decent jump in each definitely in 2Q over 1Q and 3Q over 2Q. 4Q is typically could be better, could be in line with 3Q just depending on whether or not we hit winter earlier than expected. But yes, we expect margins to improve sequentially.

Speaker 5

Okay. And then just one final question. We were also at the builder show, best attendance I think in history, a lot of M and A chatter, the most that I've heard in many years. What are the how does the opportunities that you see from an M and A standpoint for Quanex? And how are you balancing that versus repurchasing your own shares?

Speaker 2

So I think right now the way I would answer, I think growth is a major focus for us on a go forward basis. So I think both organic and inorganic expansion of existing product lines and growth in the new businesses through acquisition is absolutely a priority and we've spent resources and time pursuing both sides of that. I agree with you. I think we have seen more activity in M and A opportunities start to arise. I think the answer that I'll give today is that we continue to remain very focused on the opportunities that we look at.

Speaker 2

We'll continue to check the box as either building out our existing markets with products that add the portfolio or expand into new things and those opportunities have also got to improve the margin profile of the business. So we're focused on revenue growth through adding products in existing or new markets that improve the profitability profile of Quanix. And we will stay true to that mantra. And we have a solid business plan with or without M and A. And so we will be very diligent on what we do on a go forward basis.

Speaker 1

And with respect to stock repurchases, I mean, we have a healthy conversation with our Board every quarter it seems on capital allocation priorities. The stock repurchase authorization we have in place, I think we have about $68,000,000 left on that authorization. It's opportunistic. Clearly, our stock has performed pretty well versus our peers. So as we balance that with wanting to profitably grow this company, I think you can tell where the priorities lie.

Speaker 5

Okay, great. Best of luck.

Speaker 1

Thanks. Thank

Operator

you. One moment for next question. Our next question comes from the line of Kevin Gainey from Thompson Davis. Your line is open.

Speaker 6

Good morning, George and Scott. Good morning. Kevin on for Adam. Maybe if we could talk a little bit about the pricing pressure that you guys noted. Was it in line with what you saw in Q4?

Speaker 6

And do you think that it probably gets better or worse, as the calendar year goes on?

Speaker 2

I think the tenor of those conversations are very, very similar to what we saw at the back end of Q4. And obviously, the pressure is still there. I think we're starting to see signs of raw materials flattening out or in some cases maybe starting to tick back up again. So I think although the discussions will probably continue to be robust, I think the data behind it will give continued ammunition to say the markets are what they are right now and we're actually seeing signs that the pricing needs to hold. So I think for a couple of quarters, we'll continue to have many discussions as it relates to the pricing levels that have happened over the last few years.

Speaker 6

Appreciate that. And then maybe we could talk about it looks like EU sales were probably in line and margins were above. Does the margin strength that you guys saw in Q1 surprise you at all?

Speaker 2

I don't think so. I think it's been exactly what we would have anticipated. The growth in margin to some extent, there's a little mix issue. There's obviously operational performance. I'm extremely proud of our operational and our supply chain teams of really being ahead of the curves.

Speaker 2

So I don't think it's anything that we didn't anticipate.

Speaker 6

And then maybe we could talk about a little you've talked about it a couple of times, but maybe in general what's driving the overall margin outperformance with the decline in sales?

Speaker 2

So, it's a combination of couple of things. I think our price has been able to hold steady. I think our supply chains again are doing a very good job of leveraging their buy across divisions, finding ways to continue to reengineer products to enhance the margin of our products as well as there is a little bit of a mix issue in the quarter too. We obviously no different than any other company with a broad set of portfolio up and down on the markets. I would say the other thing that adds to the profitability piece here is and we mentioned in my comments at the beginning, I think we've established pretty well over the last couple of years that our cost model flexes really quick and up or down.

Speaker 2

And we've done a very good job of staying ahead of demand when it goes up and being able to take out cost faster than many when volume goes down. And I think the flexibility of that cost model is in play here and that's what you're seeing.

Speaker 6

Well, it's definitely showing up. And then maybe one final one just on this is more modeling, but in a Fenestration SG and A was a little bit higher. Was there any one time items in that maybe that just offset

Speaker 1

it? I mean nothing that comes to the top of my head. I'll look into it more and take it offline.

Speaker 6

Perfect. Sounds good. Appreciate the time guys.

Speaker 1

All right. Thanks. Thank you.

Operator

Thank you. I'm not showing any further questions in the queue. I would now like to turn the call back over to George Wilson for any closing remarks.

Speaker 2

Thanks for joining today. We really appreciate your time and we look forward to providing an update on our next earnings call in May. Thank you.

Operator

Thank you for participating in today's conference. This does conclude the program. You may now disconnect. Everyone, have a great day.

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Key Takeaways

  • Q1 net sales fell 8.7% year-over-year to $239.2 million as markets normalized seasonally and automatic index pricing lowered revenue, but consolidated margins expanded thanks to operational improvements, pricing discipline, and reduced stock-based compensation and interest costs.
  • Operating cash flow remained robust, enabling a $5 million debt pay-down in a seasonally weak quarter and maintaining a near net-debt free balance sheet (ex-finance leases) with a leverage ratio of 0.1×.
  • By segment, North American Fenestration revenue declined 3.3% with volumes down ~3% and pricing holding, while European Fenestration saw a 10% sales drop but a 250 bp margin gain, and North American Cabinet Components sales plunged 21.1% resulting in negative adjusted EBITDA amid low volumes and lower hardwood prices.
  • Quanex reiterated FY2024 guidance of ~$1.1 billion in net sales, $145 million–$150 million in adjusted EBITDA, and $85 million–$90 million in free cash flow, while forecasting Q2 consolidated revenue flat to down 2% and EBITDA margin contraction of 100–150 bps.
  • Looking ahead, the company expects a demand upswing in H2 driven by improving US housing starts and potential rate cuts, sees input cost stabilization for key materials, and plans to leverage a strong balance sheet for organic and inorganic growth opportunities.
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Earnings Conference Call
Quanex Building Products Q1 2024
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