Q4 2019 Earnings Call
In full year 2019, Quanex building products earnings conference call.
This time all participants are in listen only mode. After the speakers presentation. There will be a question and answer session to ask the question doing that section you will need to press star one on your telephone. Please be advised that today's conference is being recorded.
If you require any further assistance. Please press star Encino I would now hand, the conference over to the Chief Financial Officer, and Treasurer Mr. Scott silky.
Thanks for joining the call. This morning on the call with me today or Bill Griffiths for Chairman, President and Chief Executive.
Sure and George Wilson, our Chief operating Officer. This conference call will contain forward looking statement some discussion of non-GAAP measures.
We're looking statements and guidance discussed on this call and in our earnings release are based on current expectation, but actual results or events may differ materially from such statements and.
Quanex undertakes no obligation to update or revise any forward looking statements to reflect new information or are there.
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.
Our website.
I will now discuss the financial result.
Net sales decreased by 1.5% year over year to 240.4 million in the fourth quarter of 29 team mainly due to continued softness in our North American cabinet components segment.
However, we generated net sales of 800.
93.8 million for the year, which represents growth of approximately 50 basis points compared to fiscal 2018.
The increase was driven by above market growth and our North American and European Fenestration segment, which was mostly the result of price increases related to raw material inflation recovery.
Excluding.
Foreign exchange impact, we realized revenue growth of 1.4% fiscal 2019 compared to fiscal 2018.
We reported a net loss of 30.9 million or 94 cents per diluted share for the three months ended October 31st 2019, compared to net income of 6.7 million or 19th.
Since per diluted share during the three month ended October 30, Onest 2018.
For fiscal 2019, we reported a net loss of 46.7 million or dollar 42 per diluted share compared to net income of 26.6 million or 76 cents per diluted share for fiscal 2018.
The reported net losses.
Those were primarily attributable to a $44.6 million noncash goodwill impairment in the fourth quarter and a $30 million noncash goodwill impairment in the second quarter. Both in the North American Cabinet components segment, mainly due to lower volume expectations related to the ongoing shift in the market from.
I caught some to stock cabinets and customer specific strategy changes.
On an adjusted basis net income was 14 million or 42 cents per diluted share during the fourth quarter of 19 compared to 7.6 million or 22 cents per diluted share during the fourth quarter of 2018.
Adjusted net.
Net income was 31.4 million or 95 cents per diluted share for fiscal 2019.
Compared to 22.7 million or 65 cents per diluted share for fiscal 2018.
The adjustments being made to EPS are for restructuring charges certain executive severance charges.
Non cash asset.
Asset impairment charges accelerated DNA the impact of deferred loan costs for the credit facility foreign currency transaction impacts transaction advisory fees loss on the sale of a plant and adjustments related to the tax cut jobs Act.
On an adjusted basis EBITDA increased to 34.
4.4 million in the fourth quarter 2019, compared to 25 million in the fourth quarter of 2018.
For the full year 2019, adjusted EBITDA was 102.7 million compared to 89.9 million in 2018.
The increases and adjusted earnings were largely driven by lower incentive accruals.
Operational efficiency gains and the successful implementation of pricing initiatives in late 2018.
Ill now move on to cash flow in the balance sheet.
Cash provided by operating activities was 96.4 million in 2019 compared to 104.6 million in 2018.
We generated.
Good free cash flow 71.5 million in 2019 78.1 million in 2018.
As a result of our strong free cash flow profile consistent with our commitment to maintain a strong balance sheet, while returning capital to shareholders, we repurchase approximately 9.6 million of stock and repaid.
$52.5 million of bank debt during fiscal 2019.
We also exited fiscal 19 with a leverage ratio of 1.2 times net debt to last 12 months, adjusted EBITDA, which surpassed our goal.
As for 2020 guidance and as noted in the outlook section of our earnings release based on.
And trends in the latest macro data we are taking a measured approach to our 2020 revenue forecast, we expect low single digit sales growth in our North American and European finished duration segments.
Offset by continued decline in revenues in our North American cabinet components segment.
On a consolidated basis sales are expected.
To be approximately 865 to 885 million in fiscal 2020.
However, we expect to generate between 102 and $110 million and adjusted EBITDA fiscal 2020, which would yield margin expansion of approximately 60 basis points to the midpoint of guidance.
We plan to stay.
Just on generating cash and maintaining a strong balance sheet, while also continuing to opportunistically repurchase stock.
For modeling purposes, it is appropriate to make the following assumptions for 2020.
Depreciation of approximately $32 million.
Amortization of approximately $15 million.
SDMA of 102 105 million.
Interest expense of seven $8 million and a tax rate of 25%.
From a capital expenditure standpoint, we expect to spend approximately 35 million in 2020, which is about $10 million more than in 2019, as we intend to invest uncertain.
Specific projects in an effort to grow organically.
Our targeted to generate free cash flow between 55, and 60 million of fiscal 2020.
I will now turn the call over to George for his prepared remarks.
Thanks Scott.
As I reflect on our performance in 2019, it as highlighted by free cash flow.
We have over 70 million for the second consecutive year, allowing us to exit the year with a leverage ratio of 1.2 times, which easily per surpassed our goal of 1.5 points.
We also saw very strong performance in our fenestration segments in Europe , and North America.
In Europe adjusted EBITDA.
Improved by approximately 340 basis points in the fourth quarter.
And approximately 300 basis points for the full year.
Volume growth and price increases were the drivers for the improved performance in the fourth quarter and for the full year.
Excluding foreign exchange impact, we realize the book market sales.
Growth of 3.3% during the fourth quarter and 9.1% for the full year in this segment.
And our North American Fenestration segment, adjusted EBITDA margins expanded by approximately 250 basis points in the fourth quarter and approximately 110 basis points for the full year.
Volume growth price increases improved operational performance and SGN Ace savings were all reasons for the improvements.
Sales in our North American Fenestration segment grew at 6.6% during the fourth quarter and 3.8% for the full year.
Which compares.
Probably to dockers latest window shipment estimate of negative 0.4% for the three months ended September Thirtyth 2019, and negative 1.6% for the 12 months ended September Thirtyth 2019.
Our North American Cabinet components segment continue to face headwinds in 2019.
Yes.
Particularly in a semi custom segment with revenue shrinking by 8.1%, resulting in a margin contraction of 120 basis points for the full year.
Our focus in this segment going forward will be to continue to improve operational performance.
Right size our capacity footprint.
And optimize working capital.
As we look to 2020, there was a great deal of uncertainty at the macro level.
Brexit has yet to be resolved, we haven't electioneering the U.S. and there is continued uncertainty with trade wars and tariffs.
Which mostly relates to the cabin cabinet industry and.
Our case.
As a result, we feel what prudent to take a conservative view on our 2020 outlook.
We believe we can continue to outperform the market and our two fenestration segments, albeit with slightly lower overall growth expectations.
Unfortunately, we believe the semi custom segment could continue.
Due to shrink even further in 2020, resulting in our consolidated revenues being down year over year.
Notwithstanding that.
We demonstrated in 2019 that we can execute on the things directly within our control. So we expect another year of margin expansion with adjusted EBITDA in the 102.
The 110 million range.
As for capital deployment in 2020, the additional 10 million and Capex compared to 2019 is to fund growth initiatives, including a new screen facility.
The upgrade over us vinyl extrusion technology and capacity expansion in Europe .
As Scott mentioned, we will continue to focus on generating cash and maintaining a strong balance sheet, while also opportunistically buying back more stock.
And finally I'd like to take a moment to thank bill on the board of directors for giving me the opportunity to be the next CEO of Quantix.
Mhm.
Humbled by this opportunity, yes, very excited to be working with the executive team and all of your quanex employees.
We will remain focused on our internal initiatives of safety operational excellence and cash flow generation, while continuing to explore options to create incremental shareholder value.
I'll now turn the call over to Bill for his closing comments.
Thank you George.
Let me close by expressing my thanks to our board of directors in our employees for their outstanding support over the past six years, it's been a good ride and we've made significant progress in transforming quanex.
Into an industry, leading currently building products manufacturer.
While there will be no change in strategy. It is time to hand over the reins so the George and his team can take the execution of that strategy to the next level.
I will remain active in assisting George and his team as we continue down.
The path of operational excellence to further enhance profitability and cash flow and to ultimately increase value for shareholders.
Thank you.
Operator, we'll now take questions.
Thank you, ladies and gentlemen, NASA reminder.
You have a question, yes, Chris Dodd Dinoire Nanya.
Telephone keypad to withdraw your question just first Uptown key.
Our first question comes from Daniel Moore with CJS Securities. Please go ahead.
Good morning.
Good morning, good morning.
I'll just start quickly just not take a lot of time, but bill congrats on the transition and leaving.
In clinics in great shape from not only competitive, but certainly as a financial stability and liquidity perspective, and George Congrats on the promotion.
Topline guide for 2020.
If during the simple math, but implies.
Double digit declines in North American cabinets kind of an extension of what we've seen the last.
Quarter or too.
Our their lines in that that you plan to exit or their larger customers that are you mentioned some some strategy shifts among customers.
Any more detail.
With regard to its just the overall acceleration.
Away from stock to say.
Custom is that accelerating any more detail there in color there would be very helpful. Thank you.
In terms of the cabinet sales.
In addition to the continued shift from semi custom to stock, which we've noted.
The major change has been with one customer.
Who.
We had been working with one in terms of strategic projects for for a long period of time.
Change their their strategic direction during the year.
And is deciding to exit one of their product lines and so that is the big change year over year and what we're seeing on why its expedited.
From that from what Weve given guidance for in the past.
Helpful in from a cadence perspective, I would presume that larger declines in the first half of the year versus the second given that decisions made within the last several months.
I think.
It will be even is what we're seeing.
Okay to be clear, Dan we are expecting those declines.
Quarterly basis going forward.
Okay I can dig in a little further after on the margin side looking for 60 basis.
At this point of improvement at the at the midpoint, maybe can you just provide a little bit more detail around the between the segments. What your expectations look like in the drivers of.
That improvement thanks.
Sure I can I can add a little detail on color there so.
In the North American finished duration segment.
You should expect we said low saying low single digit so 2% to 3% growth. There we continue to gain share in the screens business.
We also gained some share back in the vinyl profile business and in the spacer business.
Yes, we expect some some growth there as well.
In euro.
We expect.
Again low single digit growth.
1% to 2% range, hopefully thats, a conservative number but a lots going on in Europe as you know.
We are adding a line in Germany to our space.
Facility. There were also continuing to gain a little share in our vinyl profiles business in the UK as really specifically one one competitor.
Continues to lose share and we are picking that business up for the most part.
And then and cabinets we just.
Explained.
It's really the shift mid double digit shift down the shift from semi custom to stock.
That's great color on the topline I'll ask one more.
Or just kind of review.
Looking for a little bit more detail as it relates to.
The margin expansion the 60 bips of margin expansion.
Maybe goes hand in hand with that top line that you described but if you could sort of rank order, where you see the gross greatest opportunity for margin expansion among the segments and.
But thinking that the drivers would be and I'll jump back Q Sir.
Sure on the margin expansion side, it does kind of go long.
The same on the revenue we expect the most margin expansion in North America fenestration.
In Europe .
There's opportunity for.
Better margin expansion the margins in that segment are already very healthy.
So maintaining or improving knows is the plan and then in cabinets.
Even with the lower revenue there is some opportunity to expand margins slightly.
We're still seeing the.
The results of the operational excellence programs that we've been putting in across the board. So.
We've said in past calls there would be continued.
Margin improvement in all segments of the business.
Based on those activities, albeit at a slower rate and we're seeing some of that now.
Very good understood I'll jump back in queue with any follow up thanks.
Thank you.
Thank you. Our next question comes from Stephen Ramsey Thompson Research. Please go ahead.
Hi, good morning.
It's actually Brian bias on for Stephen Thanks for taking my questions I wanted to start with the guidance for the fenestration segments.
No single digits growth you guys mentioned can you provide some color on how much of that is strictly price versus any other growth drivers and then maybe the cadence from quarter to quarter versus just the full year.
I mean without going into too much detail I think we can comfortably say that price will be less of a driver in 2020 than it was in 2019 and that.
Volume growth will drive revenue.
Higher in 2020.
And thats across the board.
Except for cabinets.
Got it is that.
Okay, even across quarters or are you seeing maybe one quarter would jump out and be more substantial versus others.
I think thats consistent across all quarters.
The ability.
At this time to forget additional price I think were priced very competitively in the market and we will see no major movements across any of the quarters.
Got it helpful. And then last one from me I guess this on the cabinet side. The guidance previously mentioned probably down double digits for the year.
Is there anything.
Throughout the year that we'd have to change significantly or I guess, what would have to change significantly to surprise on the upside and kind of do better than the guidance.
I think this.
The thing that we would look out as if there was any significant change in.
Tariffs.
Right.
That would drive the pricing of of something Oh higher that would force them to look back.
In addition to that.
If we start seeing a consumer trends shift back to support cost them from the stock is as people start to remodel.
And focus on on that and upgrading their kitchens, we may see a shift back to hire on cabinets, which with Glenn So the upside on our our business.
Understood. Thank you.
Thank you Sir our next question comes from Ken Zener with Keybanc. Please go.
Go ahead.
Good morning, gentlemen.
Morning, Good morning.
Yes.
Hello.
Yes can you hear us.
I hear you handle the.
Okay, I apologize about that.
Well.
Big quarter for everybody Bill congratulations.
George since we met.
Yes.
The slate nice incidence view as well she's got so I just want to take I think I understand how you're outlining 2020, I just went too.
Bill over.
For some basics.
You are doing so well in two of your three segments.
And North American margins are up nicely basically back to where they were in 16.
Your.
Wouldn't have thought in the middle of August chaos.
You'd be delivering the margins that you did there so.
You're obviously executing well in those core businesses and George.
As it relates to what is sustained cabinet headwinds.
Obviously, you've been involved with bill and though you know you deploy capital into cabinets you did submit the ERP.
And stuff like what is George your view cabinets.
It's unclear, what's going to happen with the terrorists but.
Is there a possibility.
That you'll have a simpler business in time.
Yeah.
You know.
You know within categories that are.
More secular in nature in terms of growth I know, who knew cabinetry is going to break away when could make you chase for knowing that ahead of time, but.
Your margins are so strong your other businesses in cabinets does an OEM in cabinets really makes sense to you and how are you going to go about determining that with a.
Board.
So.
To answer your question I think.
The first part of that would be I think it's really too early to make a wholesale strategic change in that business. As you know the shift from from semi custom down to stark happens so rapidly on wasn't predicted by.
One.
So I think that we're evaluating it we're obviously our eyes on it but it's too early to change strategic direction. However, I do think operationally, we still have a lot of runway and we're making significant improvements on a continuous basis and so you know I think we're going to let both sides play.
We're going to continue to focus on what we do well in the plants when making about even better and then we'll keep our eye on on the rapidly changing market and work with the board for strategic direction.
Okay.
Do empathize with the outages you face there.
In terms of the.
Fenestration the extrusion.
It really seems like the last.
If it's two quarters or less two to six quarters, you've been gaining share can you talk to some of the dynamics.
In that category. Please because I know you guys had shut down.
Out of the Kentucky.
In lines.
And it seems like you're actually gaining share from the point that you shut down lines is it.
What can you go into little bit of the dynamic that is affording that opportunity. Thank you.
Sure.
You know what Weve focused on.
In the vinyl space in North America, specifically over the last few years is really controlling and improving what we do still focusing on our cost structure, our ability to deliver on time and servicing customers.
And as.
Some of our customers have left us for price some price things, where we've walked away.
We've continued to focus on and doing the things that we do well the quality of the livery and as we've seen as most customers figure out that there. Their total costs is much more inclusive than just the purchase price per pound that we're starting to see some ability of us coming back and were.
Turning to capitalize on that so we'll continue to stay focused on working on operations delivering the customer service.
We feel like we're very good at more improve on and we'll continue to go after share in that way.
But it's nice to hear that related to that window M&A. So large.
No company had recently been sold.
I believe that company.
It was a big proponent of the warm edge spacers that you guys produce as well as some of the.
You know they did.
Invested in some of that the machinery to enable that possibility.
Can you talk about growth rates that we're seeing in that were much space are you still getting.
Share gains and or how does the capex side look on the window sides.
Enable greater market share gains in that category.
Sure so.
In regards to the spacer business.
Yes, we're still gaining share weve been very open in past calls that the rate of that growth is being really dictated by the ability of machine and equipment makers took to get that those high speed lines out to the customer base and there's very few globally that provide that equipment. So.
So you know lead times on new equipment or six months tour.
So are the speed of growth is really dictated by by the ability to get new equipment and so the to the market. The demand for for automated equipment is still there customers are looking for ways to automate and outsource and.
Eliminate their their labor because of the availability of labor across the country.
It's still limited.
So I think we're we're just.
We still see growth rates, it's dictated by the equipment makers right now.
Excellent and Bill if I can try my perennial question for you.
I think George is now in the seat.
Would you like to give a margin dispersion for that fenestration business in North America.
Can you never disappointed I.
As you Miss talking to you.
[laughter].
Is that a non answer though.
[laughter].
Hi, My new role as chairman, that's all I'm allowed to give at this point.
Excellent George would you like to expand upon the chairman Renaissance.
Im sorry, maybe I think.
Bill has Oh taught me well and that's a level of detail, but we're not prepared to disclose.
At this point.
Congratulations gentlemen, and all your new opportunities. Thank you.
Thank you Ken.
Thank you know and our next question is from Julio tomato with Sidoti. Please go ahead.
Hey, good morning, everyone.
Good morning.
A first off bill.
Congratulations on your success transforming quantix over the last few years, certainly a large scale transformation.
Congrats to George as well on her new role.
Thank you thanks.
So George I know you've had success.
Operational improvement can you just talk about how your background and experience.
Phonics.
Maybe shapes your vision and strategy over the next.
Three or so years or so.
Sure.
You know I think for me.
We're manufacturing company that focuses on quality product quality service.
During.
Energy efficient products to all of all of the fenestration and cabinet markets and we'll continue to stay focused on that and that starts with an operational backroom and an operational level. So.
Whatever business as we were in are always going to be put put in that regards on.
So.
My background I'm in terms of operations I think lends itself very well because our strategy has always been an operational excellence and letting that drive our performance.
Got it and.
On that point, you mentioned operationally.
You do have a lot of runway left in cabinets, but.
How about the runway for the two fenestration segments, obviously the margins Darryl are already very strong but.
How much headroom do you see.
In the fenestration segments to improve margins over a two to three year timeframe.
You know I think we.
As we've said in previous calls.
We still believe that there is some runway left not near the rate that we've captured in previous years, but and every facility and all of our product lines, we have projects and goals and objectives.
Oh I have a path to completion and we believe that they will all contribute to margin expansion.
And that's what we're focused on.
So there'll be some but just not at the rate that you've seen in the past in those segments.
Understood. Thanks for taking the questions and best of luck in 2020.
Thank you so much.
Thank you and our next question is from Daniel Moore with CJS Securities. Please go ahead.
Thank you again in the past you've gotten as far as to quantify the in rough terms the dollars.
Last one you had a customer.
Perhaps shift.
In other segments to another supplier.
Is there sort of rough terms.
<unk> dollar amounts that we should be thinking about an annualized terms.
From the customer that you called out in the cabinets business and then one last follow up.
Sure.
Based on the run rates, where we're at today, we're we're expecting that that would be between $10 million to $15 million range.
Got it very helpful and.
Bill alluded to the answer being no, but I'll ask it anyway in terms of just capital allocation towards any tweaks.
Sure subtle shifts in emphasis or focus you may have as you take over the rains in 2020 and beyond.
No is as we said in our commentary you know our normal capital expenses very consistent and we'll focus on operational improvements. So many additional 10 million. This year is really identifying a.
Three major areas in terms of the then the new screen facility.
Vinyl so some new assets in our North American vinyl.
Platform and then a capacity expansion and then outside of out we'll opportunistically buy stock as the cash flow dictates it and we'll continue to.
Oh stay on that path.
Very good appreciate the color. Thanks again.
Thank you.
Thank you and this concludes how do you any station I would like to turn the call back to the George Wilson for his final remarks.
I'd like to thank you all for joining and we look.
I want to providing you an update on our next earnings call in March. Thank you.
Thank you ladies and gentlemen. This concludes today's conference call. Thank you for participating and you may now disconnect.