Q1 2020 Earnings Call
An answer session to ask a question during the session need to press star one on your telephone.
As a reminder, today's conference is being recorded if you require further assistance. Please press star one zero I wouldn't like to be Smelters conference call Mr., Scott Soapy Senior Vice President Chief Financial Officer Treasurer, you may begin.
Thanks for joining the call this morning.
On the call with me today, It's George Wilson, our President and Chief Executive Officer. This conference call will contain forward looking statements some discussion of non-GAAP measures.
Forward looking statements and guidance discussed on this call and in our earnings release are based on current expectation.
Actual results or events may differ materially from such statements and guidance and quanex undertakes no obligation to update or revise any forward looking statements to reflect new information already that.
For more detailed description of our forward looking statement disclaimer and a reconciliation of non-GAAP measures to the most directly comparable GAAP measures.
We see our earnings release issued yesterday and posted to our website.
Now discuss the financial result.
On a consolidated basis revenue was essentially flat year over year in a quarter, where we expected to see mid to high single digit declines driven by the continued shift in the cabinet industry to start cabinets.
The reality is we reported net sales of 196.6 million during the first quarter 2020, compared to 196.8 million during the first quarter of 29 team.
More specifically revenue was down by 3.8 million in our North American Cabinet components segment, but 3.4 million of that decrease was attributable to a single customer who decided to exit the cabinet business altogether.
Spot orders were strong during the quarter and we're seeing early signs that the market shift from semi custom to start cabinet maybe stabilizing.
In fact, the latest Casey am I Casey it made data market.
Showed that semi custom cabinet sales were only down by 27% year over year. This has the lowest rate of decline we've seen an over a year.
Revenue losses in our North American Cabinet components segment were offset by above market growth and our European fenestration segment and growth in the low single digits and our North American Fenestration segment.
We reported net income of $10000 or zero cents per diluted share for the three months ended January 31st 2020, compared to a net loss of 3.6 million or 11 cents per diluted share. During the three months ended January 31st 29 team.
We're pleased to say that this is the first time sensitive since the company's 2008, then all from Quantix Corporation. We have reported net income in the first quarter of our fiscal year.
On an adjusted basis net income was $1.2 million or four cents per diluted share during the first quarter 2020 compared to a net loss of 2.3 million or seven cents per diluted share during the first quarter 2019.
The adjustments being made to Lps are for restructuring charges certain executive severance charges.
Celebrated DNA.
Foreign currency transaction impacts transaction and advisory fees and adjustments related to the tax cuts and jobs that.
On an adjusted basis EBITDA increased by 30% to 15.7 million in first quarter of 2020. The increase in adjusted earnings was driven by an ongoing concentrated focus on controlling costs improved operating leverage operational efficiency gains and lower medical expenses.
Moving on to cash flow and the balance sheet.
Due to the seasonality of our business, we're typically a net borrower in the first quarter of each year.
Having said that we borrowed 50% less cash in the first quarter 2020 than we did in the first quarter quarter of 2019.
As a result free cash flow improves significantly during the quarter and we repurchased 4.6 million of our stock at an average price of $17.19 per share.
Our balance sheet remains strong and we exited the quarter with a leverage ratio of 1.4 times net debt to last 12 months adjusted EBITDA, which is a full turn better than where we were a year ago.
I'll now turn the call over to George for his prepared remarks.
Thanks Scott.
We're off to a solid start in fiscal 2020 as first quarter results continued to reflect our ongoing focus on operational excellence and cash flow generation.
I will now provide some additional comments on each of our operating segments.
Starting with our North American Fenestration segment, where revenues were 1.3% higher than prior year.
On a more granular basis within this segment.
Revenues specific to fenestration anywhere else grew by 3.2% year over year, which compares favorably to dockers latest window shipment estimate of 2.5% group for the three months ended December 30, Onest 2019.
On an adjusted basis EBITDA in our North American Fenestration segment decreased by approximately 20 basis points versus prior year.
Labor inefficiencies were the primary driver of the slight margin decrease as we built inventory ahead of a significant capital project.
Our European Fenestration business delivered another good quarter as a result of solid demand in the UK market that was partially offset by the timing of space or sales to Asia.
Excluding the foreign exchange impact this segment generated above market revenue growth of 3.7% versus prior year, which was better than we expected.
Adjusted EBITDA margin for European Sequestration segment was approximately 100 basis points better than prior year.
Timing of price increases.
Stabilization of raw material costs and productivity initiatives all contributed to these favorable results.
Revenue in our North American Cabinet components segment decreased by 3.8 million were 7.1% year over year.
As we mentioned in our fourth quarter earnings call, we had a customer who made a strategic decision to exit the manufacturing of cabinets.
We stated the impact to our revenue as a result of this change would be a reduction of 10 to 15 million on an annual basis.
In the first quarter. This accounted for 3.4 million of the 3.8 million shortfall.
The remaining decrease was driven by the ongoing but slowing shift in the market demand from semi custom to start covenants, which was offset somewhat by an increase in spot business.
As Scott mentioned sales in the semi custom cabinet market decline, 0.7% year over year during our fiscal first quarter, which was the slowest rate of decline in more than a year.
There appear to be signs that the cabinet market is beginning to stabilize.
We will continue to monitor the market closely but we can certainly say that the volume of quoting activity for spot buys has increased significantly which we believe as a result of the tariffs and supply chain disruptions caused by the Corona virus.
Despite the decrease in revenue for the North American Cabinet components segment, we realized an improvement in adjusted EBITDA margin of approximately 70 basis points.
This margin expansion as being driven by lower material cost continued operational improvements in our own efforts to reduce SDMA within this segment.
Finally, when looking at unallocated corporate and other costs, we realized a year over year improvement of 2.8 million.
Which was primarily driven by lower medical costs as we have experienced a significantly larger number of high dollar cranes in 2019 than we realized so far in 2020.
Overall, we're very pleased with our fiscal year started and we are optimistic looking ahead into the spring selling season.
It is too early to increase our annual guidance at this time, but there's potential to do so later in the year. If the results continue to exceed our expectations.
As such at this time, we're confident in reaffirming our guidance for between 865, an 885 million in revenue.
With adjusted EBITDA between 102, and 110 million.
Going forward. Our plan is to continue to use our strong cash flow to invest in high return internal capital projects, while maintaining a strong balance sheet and opportunistically repurchasing our stock.
We firmly believe that this strategy puts us in a strong position regardless of what the economy. They do.
And with that operator, we're now ready to take questions.
Ladies and gentlemen, if you have a question or comment at this time. Please press Star then one key on you touched on telephone.
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Our first question comes from Dan Moore with CJS Securities.
Good morning, this is actually a brendan on for Dan So.
I wanted to ask warning.
First of all George that you've been their role for a couple of months could you update us on any strict.
Dziedzic direction or focus changes or just a general update that youve given several changes relative to the direction at below taken over the past here too.
As we said in fourth quarter earnings.
Earnings call.
The fact that I was the internal successor to Bill there was going to be no substantial changes in strategy going forward I was a part of the strategy creation with existing team and we're very confident that the strategy that was in places with the right going going forward and so.
There are no strategic changes.
We are extremely pleased with the transition the team has responded well and everyone's focused on doing exactly what we have laid out to do under billing. We continue to do for on a go forward basis.
Okay, and then of following up on that now with the leverage comfortably below two.
What are your top priorities are just say over the next few years with your strong cash flow.
How do you like to allocate capital.
We're going to continue to focus on internal projects that generate.
Hi returns.
We're going to continue to Opportunistically buy back our shares.
And we'll.
Build cash.
To capitalize on projects as they come forward. So those are the three priorities internal projects a cash.
Share repurchasing.
And a building cash flow.
Great and then last one with.
You fenestration.
Are you seeing any.
Changes or tangible impacts are you from.
Greg this on the back burner, now, but any it impacts from there or anything else.
Still status quo.
It's really still status quo, we've been very happy with the performance in the growth in our you markets than we see no changes.
And expect no changes.
Great. Thank you that's all for me.
Thank you.
Our next question comes from Rubin Gardiner with benchmark.
Thanks, Good morning, everybody.
Good morning.
So maybe let's start with.
The cast the cabinet business. So you mentioned, you're seeing a stabilization and semi custom.
Can you elaborate more on what you're kind of outlook is for that portion of the market. The rest of this year and then in the same segment margin expansion.
Good margin performance in the quarter was pretty.
Pretty impressive in this environment, what what exactly drove that and do you have more more runway over the next.
Next few quarters.
So as it relates to cabinet revenue.
And what we're seeing in the market.
We believe that what we're seeing is a result in a stated my comments are result of the tariffs and the disruptions in the supply chain as a result of the current virus.
As it relates to the tariff so things have been gone ongoing and were present in the end of one or end of last fiscal year.
We believe those things will continue in that environment stays in what we're seeing as our customer base evaluating their supply chain and trying to minimize risk which has been an opportunity for us.
So I see no change in that on a go forward basis.
The short term hopefully short term.
Disruptions as it relates to Corona virus I think what it is again doing is forcing our customers to look at the risk of having such a global supply chain and making sure that they have opportunities to source and backup plans elsewhere, and we're going to capitalize on that.
As it relates to your question on margin expansion.
We see all of our projects proceeding as expected and the guidance that we've given we see no reason why we will hit those numbers one on annual basis. So were.
We're pleased at this time with the progress we're making.
Great. Thanks, George and then.
Your capex.
On the home announcements that your Capex.
Descriptions last quarter in your planned investments can you update us on.
You know those investments what the benefits.
That you're seeing so far if any and I know that you're doing some work to grow your screens business at least in some new geographies can you talk to us about what kind of what kind of growth opportunities you see for that part of the business.
I have just.
Housing environment.
In terms of the capital projects that we haven't plays that we highlighted at the end of our last fiscal year, what I can say.
Because we won't get in to that level of detail, but what I can say into it a high level was all of our projects remain on time and as expected. So we're very pleased with the progress and we believe that the benefits and the returns that we predicted as a result of those projects will will come to fruition. So everything's on time and as planned.
In terms of screen expansion.
Again on time and as planned we expect to those we talked about to expand into the northeast market operationally, we expect them the timing of that to be the end of our fiscal Q3 and everything is again on time and to plan.
So we're we're pleased with the progress.
We think that the market will continue to look at opportunities to outsource.
Components.
Labour remains tight in almost every region and will compare our footprint in our opportunities.
So the opportunities being presented with those outsourcing activities.
Great. Thanks, Congrats on the quarter and good luck rest of the year.
Thanks Rubin.
Our next question comes from Stephen Ramsey with Thompson Research group.
Good morning.
I have a handful questions on.
German spacers I guess to start with.
Where where we add again on the new line or lines coming online.
And.
If we're already if there are already in place how fast you expect that to ramp up.
The equipment is in place it's being.
Launched again on plan on target.
Our continued efforts now to fill that capacity up with revenue.
It is on steam and on progress, we don't give that level of detail as to the revenue per line or anything of that nature.
With the revenue growth that will see what's being the opportunity presented by that equipment is.
As expected.
We're hitting our targets that we forecasted in our numbers.
Excellent and I guess.
On the margin impact just given you margins are very strong and yet you're still investing heavily in German spacer grows I guess is this diluting margins to significant degree.
And just any commentary around the current margin impact and maybe once this.
Investment kind of matures, how it impacts margins.
The space or that we produce in Germany.
Fits a very specific high end market so.
We see.
Very good growth opportunities for the spacer market and the fact that serves a relatively specific niche in high end.
Types of projects, we don't expect nor anticipate any sort of degradation in margins.
But as it had some more mature phase and sales staff has ramped up.
And.
Products are delivered to customers.
I guess ultimately it would be.
Hi.
So the margins over time.
As we continue to grow that segment it could have a favorable impact on our margins.
And that's our plan.
Excellent. Thank you.
Thank you.
Our next question comes from Julio remember with Sidoti and company.
Hey, good morning, everyone.
Morning morning dealer.
Hey, I wanted to ask about.
Your cost control initiatives, you saw essentially no corporate costs in the quarter on can you just talk about what you're doing there what's driving that and if this quarter changes your full year EPS unique expectations idle.
As as we've made the transition there's really two pieces in the corporate us.
As we've made the transition to a new leadership team.
End of reevaluated.
What we're doing in how we're going up there are some some synergies and some cost benefits to those changes.
But the main driver this quarter is really been on the medical costs and what has Grove is in 2019, we have.
A significant number of one time large.
Medical claims that we just haven't seen that level of so significant activity. This year. So there has been a a pretty large benefit medical costs quarter over quarter.
And then really as you know it.
Almost impossible to be able to accurately forecast what those medical claims may or may not do going forward.
Got it wanted to switch over to the cabinet segment.
One thing you guys had talked about a couple of quarters ago as potential conversion of capabilities in the cabinet business to potentially service some other price points within the market.
Yes can you give us maybe an update on it.
Any progress there and any takeaways from weather conversion of those capabilities make it makes sense or quantix.
Indeed.
We've launched a new process on a small scale to test out operational capabilities.
It really before we make a decision in terms of investing heavily in that segment going through a lower price point, we really feel that were being prudent by allowing the market to settle and not making rash decisions in a volatile time. So we're preparing in both steps weve operationally testing our capability.
He is on them, we're preparing and monitoring the market to determine when we'll make that final decision on how much in what to invest.
Okay, that's fair and I appreciate the color there.
Just last one for me is on the North American Fenestration segment.
You called out some some labor efficiencies there inefficiencies.
Was that concentrated in maybe a certain geographic area and do you still see that segment is having the greatest opportunity for margin expansion in fiscal 2000.
It was concentrated within one specific line being driven by one very specific capital project.
So it wasn't geographic will.
It was project related.
In terms of margin expansion, we still think as we said that the Antonio segment will hit their operational performance, but that we forecasted on a go forward basis. So we think it will recover and provide the expected margins that we anticipated at the beginning of the year and we've guided to.
Got it appreciate the color thanks, very much and best of luck in fiscal 2000.
Thanks, Thank you.
Your next question comes from Ken Zener with Keybanc.
Okay.
Good morning, gentlemen.
Or intent.
The cabinet bidding process as customers seek to shorten supply lines.
These risks could you just give us a little more.
Flavor for kind of how that is I mean is that coming from builders is it coming where do you think I mean, obviously that that the manufacturers, but where is your sense in terms of where it's coming from.
Is it really the components that you've had already in place or they seeking.
Actually expand the dialogue.
And what type of lead time do you feel that they're talking about.
So what we're seeing obviously the information coming from our customer which is the OEM, we feel like there's been no significant change there's actually demand on the builders head of the business.
Uh huh.
[music].
[laughter].
The our customer supply chain, which which can be heavily weighted to overseas suppliers.
It's just that risk.
And so we see a lot of opportunity.
Both from our existing customer base in some new ones about trying to minimize that risk in low looking at internalizing and bringing in there there their supply base to a domestic weren't more convenient supply.
As you know Ken and we've we've talked about Openway are.
Our route to market is very short lead times, enabling our customer to carry low inventories and have significant less risk in terms of carrying inventory and thats, what we do and that's what we're focused on and selling on so.
Right and within that short cycle.
Turnaround.
Vein said, we've seen obviously, it's been a very volatile market right for stocks, but we've really seen some stocks getting hammered because people think their supply chains are potentially shutting down coming out of China.
So it seems as though your customers might be.
With that short lead times.
Actually crowns to be very.
Not just interested that perhaps panicky if their product is not available right on it to either kind of just they can't do anything without coming to you have you seen really an increasing rate of concern from your customers on terms. These orders I mean, it seems like their inventory could drive pretty quick if they werent using you and now they're interested.
And using your that's why.
Pursuing this line of questioning.
No I understood question and again I can't.
I can't speak with certain are they getting worse.
Basically I mean, if their inventories disappearing you can't come in are they coming to you with that ever increasing rate of interest.
Last panic I don't I don't have visibility into that count all I can say is that the the rate at which we're seeing different opportunities on a spot basis have increased so.
For me to make presumptions on why that is the case I would be guessing.
Fair enough George.
Who thought Brexit.
Would it be such a high post Brexit Europe would be such a high margin business.
For the U.K. I mean can you talk about now, but that's it's been done I mean, it is the business were stable I mean, how is the UK kind of.
Working I mean, it's just continued to check along and.
Pricing was through to cover the deflation in the pound how is all that work has it been pretty steady.
In the UK the market itself.
The market itself has been very steady.
What we see in the product that we serve in terms of vinyl profile and to the extent spacers.
They go into two obviously when those unwritten residential homes.
Jewelry of the market is our and our there because the infrastructure is old.
Theres a constant demand to replace old when those.
As windows fail, they have to replace it so it's a relatively stable market and we've done a very good job I think capitalizing operationally on on delivering and servicing our customers in a market that will continue to be very stable for those reasons, it's an under built an underserved market.
We like being in.
And then can I can add a little to that on on the topline side.
Which obviously, we're converting well.
We're selling more product to existing customers, but we've also been successful last year, which is paying dividends. This year in acquiring new customers specifically in our vinyl profile business in the UK. So that's that's translating well for us.
Appreciate that Scott and then my last question George you mentioned that you're not revising up.
Your guidance for the year think that's appropriate.
But that commentary is that predicated upon the first quarter being a positive net income number and then you know for example, and specifically where would you see that upside I mean is here.
Hi confidence.
Probably in cabinets, given margins and given potential demand trend or.
That lie within.
Fenestration North America.
So Ken this is Scott I'll.
Take this one so obviously the first quarter being a good quarters gives us some optimism going into the spring selling season conversations with our customers adds to that optimism. We're sitting here in early March and we can say that February gives us some optimism and I think.
The upside if there is upside to our guidance later in the year first it would probably translate to the topline.
As we're seeing some good spot business in cabinets.
And then on the bottom line it will translate but not to the extent that we're seeing revenue growth above that of our original forecast.
Understood. Thank you gentlemen.
Thanks Kim.
And I'm not showing any further questions at this time, let's turn the call back over to George.
Thank you everyone for joining and we look forward to providing an update on our next earnings call in June.
Ladies and gentlemen. This concludes today's presentation you may now disconnect and have a wonderful day.