Q2 2020 Quanex Building Products Corp Earnings Call
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Ladies and gentlemen, thank you for standing by and welcome to the second quarter 2020, Onyx building products Corporation earnings Conference call.
At this time all participant lines are in listen only mode.
After the speakers presentation, there will be a question and answer session.
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Adviser today's conference maybe recorded.
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I'd now like to hand, the conference over to your host today Mr. Scott.
Vice President Chief Financial Officer, and Treasurer. Please go ahead Sir.
Thanks for joining the call this morning.
The call with me today is George Wilson, our President and CEO.
This conference call will contain forward looking statements and some discussion of non-GAAP measures.
Forward looking statements in 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 quanex undertakes no obligation to update or revise any forward looking statements to reflect new information or events.
For 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 discuss the financial results.
We generated revenue of 187.5 million during the second quarter 2020, compared to 218.2 million during the second quarter 2019.
The decrease was primarily attributable to softer demand in April related to the cobot 19 pandemic.
Volume began to decline in late March which is also when our two manufacturing facilities in the UK were shut down completely to comply with government orders.
We reported net income of 5.5 million or 17 cents per diluted share for the three months ended April Thirtyth 2020, compared to a net loss of 24 million or 73 cents per diluted share. During the three months ended April Thirtyth 2019.
The net loss in the second quarter of 29 team was mainly due to a $30 million noncash goodwill impairment and our North American cabinet components segment.
On an adjusted basis net income was 6.4 million or 19 cents per diluted share during the second quarter 2020, compared to 6.3 million or 19 cents per diluted share during the second quarter 2019.
The adjustments being made EPS are for restructuring charges impairment charges certain executive severance charges accelerated DNA foreign currency transaction impacts and transaction and advisory fees.
Adjusted earnings were essentially flat with lower SGN, a offsetting volume declines related to the pandemic.
On an adjusted basis EBITDA for the quarter was $21.8 million compared to 23.4 million during the same period of last year.
Moving on to cash flow in the balance sheet cash provided by operating activities was 2.5 million for the six month ended April Thirtyth 2020, compared to 143000 for the six month ended April Thirtyth 2019.
Year to date as of April 30, free cash flow was slightly lower than last year, mainly due to the negative impact the pandemic had on working capital during the second quarter as it was hard to adjust inventories quickly due to the speed at which it hit.
However, we expect an improvement in working capital in the second half of the year and have reduced our capital expenditure program.
We now plan to spend between 20 and 25 million. This year and currently expect to generate 30 to 35 million in free cash flow in the second half of the year.
As previously disclosed we drew down our revolver by 50 million during the second quarter as a precautionary measure.
We have subsequently repaid the $50 million and do not expect to have to draw on our revolver again for the rest of the year. However, we may use our swing line as necessary in the normal course of business.
Our balance sheet is strong we have ample liquidity and our leverage ratio of net debt to lap.
At 12 months adjusted EBITDA remained unchanged at 1.4 times as of April Thirtyth 2020.
We will continue to focus on generating cash and paying down debt in the second half of the year, which should offset the decrease in forecasted EBITDA enough to keep our leverage ratio around 1.4 times for the remainder of the year.
Because of our strong liquidity position and confidence in the second half, we do not foresee a change to our current dividend policy I'll now turn the call over to George for his prepared remarks.
Thanks Scott.
Prior to giving my commentary on the quarter I would like to take a moment to thank all of my Quantix teammates for their dedication and efforts during this global pandemic.
As a group they accepted the challenge of being in a central business and maintain production. So that we could provide uninterrupted service and products to our customers.
They did this in an environment, where the rules and regulations seemed to change daily.
In addition, we witness countless examples of our employees, giving their time talents and resources to help others in their communities.
I'm humbled and thankful to be on a team with so many amazing people. Thank you.
Similar to our first quarter, the second quarter started strong and our results were trending better than projections.
However, the cobot 19 pandemic and related regulations began to impact our business toward the end of March.
As such our focus shifted to the following priorities.
First the health safety and welfare of our employees.
Second supporting our customers.
And third liquidity and cash flow management.
Companywide, we have a very robust enterprise risk management process that evaluates various risk scenarios and prepares action plans to mitigate those risks.
One such risk was a global pandemic and when Cobot 19 hit we were able to react quickly as we already had a plan in place.
I will now discuss results from each of our operating segments I'll start with the North American Fenestration segment.
Each of our plans from this segment was deemed and essential business and operated throughout the entire quarter.
Revenue declined 5.9% from prior year Q2.
But we were seeing revenue growth prior to the impact from a pandemic in fact revenue was trending 3.1% above prior year levels for the first five months of our fiscal year.
However revenue in April declined by approximately 25% year over year due to the impact from Covidien 18.
As we've stated in the past our cost structure is highly variable in nature and as such when our volumes dropped we acted quickly with furloughs reader reduced work hours and reductions in discretionary spending.
Which enabled us to protect our margins. In addition, as DNA reductions lower medical expenses and lower incentive accruals all favorably impacted results and we were able to realize a margin expansion of approximately 100 basis points in this segment during the quarter.
Revenue in our European Fenestration segment decreased by 27.2% from prior year to $29.2 million, excluding foreign exchange impact.
Similar to our North American Fenestration segment revenue was trending 2.4% above prior year levels for the first five months of our fiscal year.
However, largely due to the fact that the UK was shut down completely.
Revenue in April was down approximately 85% year over year.
As Scott mentioned in his comments, our UK manufacturing facilities, where mandated to close on March 20, Fiveth and just recently restarted operations.
Our German manufacturing facility remained operational but on reduced shifts and work hours.
Our North American Cabinet components segment generated revenue of $50.7 million during the quarter.
Which was 19.4% less than prior year.
This volume drop was driven by cobot 19 related impacts.
And the previously announced loss of one customer who exited cabinet manufacturing and late 2019.
Revenue in April decreased by approximately 37% year over year.
After adjusting for the lost customer revenue was down 14.6% for the quarter and 34% in April.
The decrease in revenue in this segment was intensified due to the fact that some of our customers are located in states, where cabinet manufacturing was not being the central as a result, they were forced to close for some period.
While each of our cabinet component plants was DMD central and continued to operate throughout the quarter. The rapid pace of the customer closures and other states made a challenging to manage our fixed cost while balancing the needs and delivery requirements of our operating customers.
We aggressively managed our variable cost structure by quickly implementing temporary furloughs and shortened work weeks, but the closure of some customers. Nevertheless had a negative impact on the segment's EBITDA and margins.
EBITDA was also impacted by a 1.8 million dollar accrual for writing off a portion of the inventory associated with Chinese source product for the customer that exited the cabinet business.
Absent this write off.
We would have realized margin expansion in this segment as well.
As I mentioned earlier, managing liquidity and focusing on cash flow has been a top priority.
As such we are actively managing the line items that we can continue can control.
We are proactively working with our suppliers on extended terms and payments.
We're also making progress and adjusting our inventory levels to match volumes.
So this process does take some time given the rapid drop in shipments.
Capex has been reduced in an effort to optimize cash flow.
However, because of our strong liquidity position, we will continue to spend capital on safety related projects and growth related strategic projects such as the vinyl extrusion technology upgrade project that we haven't Kent Washington.
We continue to be confident in our ability to generate cash and manage working capital during the second half of this year.
These moves combined with a normal seasonality of our business should allow us to generate $30 million to $35 million of free cash flow for the full year basically all of which will be generated in the second half.
Like most other companies we withdrew our guidance for 2020 as soon as the negative impacts from a pandemic started to become apparent.
As mentioned results for the first five months of our fiscal year through March were solid.
Revenue fell quickly though in April.
But we were prepared and we took the appropriate actions to minimize the impact to our business and margins.
We are beginning to see signs of recovery and optimism across the building products industry.
We currently anticipate Q3 revenue will be down by 20% to 25% year over year in North America, and adjusted EBITDA margin will be down 350 to 400 basis points.
For the third quarter in Europe, We currently expect revenue to decrease by 40% to 45% year over year with adjusted EBITDA margin contracting contracting by 50 550 to 600 basis points.
This forecast assumes a slow recovery in Europe.
No second wave of Covance 19.
And no further shutdowns or restrictions on our facilities.
While we have very little visibility into our fourth quarter, we anticipate volumes will improve over Q3.
But will not recover to prior year levels.
We will provide an updated view on the full year when we when we report third quarter earnings in early September.
But we're very encouraged by what we're seeing and hearing from our customers.
In summary, although we expect negative negative impacts from the cobot 19 pandemic to continue throughout this year. We are optimistic that we're seeing signs of recovery. We will stay focused on managing all items under our control with a continued emphasis on generating cash and maintaining a strong balance sheet.
With that being said operator, we're now ready to take questions.
Ladies and gentlemen, if you'd like to ask a question at this time. Please press the star and the number one key on your touched on telephone to withdraw your question press the pound Keith.
And that is star then one if you'd like to ask a question at this time.
Well.
Our first question comes from Daniel Moore with CJS Securities. Your line is now open.
George Scott Good morning, Thanks for taking the questions.
Good morning.
And I will say congrats on.
Solid results given all of the challenges that you certainly faced and work through.
One too.
I will talk about George you.
Volumes in May kind of not as soft as anticipated.
I'm, assuming you're referring to little bit more to the North American operations.
And maybe just give a little sense.
The the cadence of.
The declines that.
Our embedded in that Q2 guidance that you gave.
Hello, how we will be trending kind of early part of its.
May and now how are we looking tenant really part of June just trying to get a cadence for how.
Each of the businesses are coming back out.
So Dan this is Scott let me start with this answer so we referenced April volumes in Georgia scripts on a consolidated basis revenues were down in April about 40% year over year.
If we look at May which were still closing the books for but revenues look looking like we trended at about 30 down 35% year over year. So it improved in may from April by about 5%.
Some of that is the fact that.
Europe started back up in April our two UK facility started operating pretty much mid month started to ramp up there.
Looking into June we expect to further improvement. However, when we were going end of May we thought may was going to be the low watermark for the year in it it ended up being from a volume standpoint better than April so thats, what gives us some confidence going forward I think in this is George and nor in North America.
Slightly better than we anticipated I think.
We were pleasantly surprised really not knowing what the reaction would be in the UK and certain countries in continental Europe of when they started up and the.
Demand was was better than anticipated and optimism seems strong. So I think that was probably a larger impact on our optimism around North America was better and but as we expected.
Very helpful and in terms of the furloughs.
The maybe just kind of give a sense for.
How much of what percentage or how much of those if thats come back online really what I'm getting at is your what level of capacity utilization are you operating across three businesses today and when would you expect to be back to sort of pre covance metals.
So obviously in the UK I'll, just start by saying that the UK facilities were completely shut down so.
We're probably right now at about.
30% to 40% of our capacity home Buffalo situation, there is different because of their government subsidy plans.
In North America.
At its highest we were approximately 30% of our employees being furloughed and we're now below 10% to give you a frame of reference.
Got it very helpful.
Scott how much the really impressive to see the free cash flow target.
Staying as strong as it is how much working capital benefit is.
In terms or as a range is implied in that guidance of 30 to 35 million for the full year.
Yeah, that's tough to answer, but what I can say is.
Compared to where we ended Q2, we absolutely expect some benefit from working inventories down and then as you may imagine the A.R. and HP side of the business in Q2 suffered a bit because of coded we.
Extended some terms on a temporary basis and we expect for those terms to revert back to the original terms here within the quarter. So we expect working capital to be a benefit in the second half.
Okay, one more for me I'll jump out.
Just trying to get a sense for corporate the cdna.
Control was up.
Honestly very strong.
Corporate it was actually a benefit.
So trying to on about two and half million in the quarter. So was that mostly reversing comp accruals.
Healthcare related trying to get a sense for.
What.
What drove that the change in ESG DNA.
Corporate side, and what a good run rate might be going forward. Thanks.
Sure So you're right.
What drove benefit was largely driven by.
Comp accrual reversals, obviously because of the impact from coded medical is lower than we anticipated and then stock based comp was obviously lower because our stock price took a hit rebounding nicely today, which is good to see I'm going forward I think.
Two and a half million a quarter I think is what we would expect going forward and that would be an expense not a benefit.
On the corporate partially a best unit.
Correct correct perfect, Okay ill jump back in queue with any follow ups. Thank you.
Thanks.
Our next question comes from the Alimera with Sidoti Your line is now open.
Hey, good morning multiples are going well.
Good morning.
So I wanted to start on North American administration.
So margins probably unlikely given with the decline could you if you break that out for us.
From maybe theres structural cost reductions versus more shorter term expense management.
Oh.
As we as we look at that Julio I mean, the majority of what we saw home.
Is structural.
The short time, and we will have to get back to you on details with the breakout obviously.
It's volume dropped.
We manage just some of the discretionary spending just as you would expect that it's really hard to determine.
Exactly those pieces when you bridge bridge it out so, but I would tell you and I think you've seen this in prior quarters.
Under under bills guidance, and what we're doing the majority of the things that we've done operationally in cabinets as well as anyhow, our structural in nature and we expect that these types of improvements.
Yes, I was pleasantly surprised by margin improvement there and I know last quarter, you had called out some labor inefficiency in that segment and the related to us specific project, but it sounds like maybe those inefficiencies onto at this point.
In that specific one that we talked about we believe that we have that.
Headed into right direction not completely fixed but.
We saw significant improvement so yes, now Julio to be fair you, what you're seeing in that year over year improvement for North America penetration in EBITDA margin that does include some.
Incentive accrual reversals as well, yes that did help.
Got it and I guess.
As you begin to see kind of end market stabilizing. It's how are you thinking it could lawler retired about capital allocation I know you're focused on on debt reduction but.
Do you maybe have any update on some of the internal projects you are considering especially considering that cash flow that you mentioned earlier.
Sure.
So we talked about the debt reduction of the dividend policy will stay as is but in terms of our capex, we're going to continue to prioritize it based on safety project, there's three or four strategic projects that will continue on.
The extra net.
Vinyl extrusion project, which I mentioned in my in my script as well as well continue to spend money on on screen expansion into into regions, where we are underserved right now so.
Anything related to strategic growth projects, we will continue to spend money on.
And just to.
Add to that Julio with the screens business, we are moving forward opening a new screens plant.
Here in August September timeframe.
Excellent thanks, taking my questions and healthy.
Sure you as well.
Our next question comes from Stephen Ramsey with Thompson Research Group. Your line is now open.
Good morning, I guess on the morning hate.
Hi, good morning, yet on the UK plants being shut down now operating again.
How much backlog was less sitting and how much of that.
It's been canceled or do customers.
Still desire that product and.
Eric time lag.
Those quarters Stifel filled.
We think that the initial demand that we're seeing is backlog related but the good news that we have in the UK is that their order and opening up did not prohibit people installers and salespeople from going into the homes in.
That continues to remain unknown, what's the consumer sentence.
Confidence and allowing others into their house, but what I would say as short term feedback is that all of that remains pretty strong and people were investing in projects when their own homes.
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Good to hear and then on.
Cabinet business.
I know a mix the decline with the customer exiting the business and then.
You talked about in the last quarterly calls in the custom.
Stabilizing I guess, you know is there any weight.
Get us steel for semi custom how it trends from here will it.
Kind of remain in the stabilized eight or could this accelerate declines in the in the coming quarters.
So we're trying to digest, the new Casey I may numbers.
There was such a rapid change across a lot of the segments.
It's really hard to determine what was causing any sort of drop and so I think that.
For us to be able to determine the ships between starcom semi custom and getting balanced we're going to need another quarter to have looked to be able to determine what is that true impact on.
We anticipate that.
The conditions are such that people will start looking at the earn our projects and we're seeing signs of that.
And we think with wood pricing starting to stabilize that the semi custom market that we participate in will be a good place to be.
Great and then lastly for B I guess.
Circle back to the inventory.
Question, you talked about in the last.
Quarterly call. How you built up inventory ahead of large capital investment in North America Fenestration.
I guess, how does that play out as the quarter moved along is that kind of does that factor passed this or.
Is that part of the inventory work down that you're in the process.
It is definitely part of our inventory work down obviously, you try to build and level load those plants to be able to.
Manage the peaks in the busy time.
Right now.
As our forecast, we're trying to evaluate what that peak will now be we are bleeding down inventory. So so that is part of this process.
Great. Thank you.
Thanks, Thanks Steven.
Our next question comes from Rueben Garner with the benchmark Company. Your line is now open.
Thank you good morning, everybody.
Let's see so maybe on the margin front. So is there is there anything.
Structurally different from a.
Maybe it from a fixed variable standpoint between the North American Fenestration segment, and the cabinets business or was the.
The margin kind on.
I guess performed relative margin performance in the quarter.
Solely tied to those issues going on with some of your customers in the cabinet side, not being able to be open in the quarter. In other words, you were able to expand margins year over year in windows. Despite everything going on but you had you had some pressure on the cat.
Yes.
You know with without the loss so over the or without the write off of the the accrual for the the customer that left the inventory accrual, we would've had margin expansion and covenants as well in the quarter.
However, the difference between through that we called out is truly a.
Managing that fixed cost piece, when we have certain customers.
That did shutdown for cabinets and we didn't see that in North American fenestration, So thats really the difference our customer base on the any upside.
Almost every customer was deemed essential and in the cabinet side, we did have some so.
You have to continue running.
The plants in the cabinet side.
At less than ideal.
Run rates and levels to support the ones that are still running so thats the biggest difference.
Rubin.
Okay got it and then.
Maybe on the.
Let's see on the guidance for Q3, so I think if I'm reading this correctly, it's implying some were the quarter being down in that 25% to 30% range, so little bit better than the trend you're seeing in may I'm, a little surprise that it that you're still seeing that are expecting.
That type or those type of declines is it.
Do you have any way of breaking down what your what your new business looks like relative to your aren't our I know that might be difficult, but the reason I'm asking is a lot of the builders tend to be pretty optimistic that thing in fact, even already started to bounce back in in May.
Is it that the new construction side is going to bear a lot better and the on our side might not because people are has been to have contractors come in their home to do things like replaced kitchen cabinet can you just talked about maybe what you're hearing in there.
I think I think.
We are seeing or we are hearing optimism from our customers as well on so.
I think what were what we're dealing with right now is where we're out in the supply chain you have our customers also trying to work through inventory levels and adjust so so where we're at in the supply chain of its just delayed so we won't see the impact of some of us on for a little longer than those builders and some of the Oems and but we're done.
Currently hearing optimism Ruben and we think because as people.
Reduce their travel and some of the larger expenses on that type of thing, they're going to they're going to invest in we're seeing more of that type of invest in their homes and living spaces.
And we see more of that optimism. There's a lot of comments that housing will lead the recovery and we are hearing that.
Great sounds good and then last one from me.
Any.
I mean, obviously some of the state that were shut down.
We're going to see it but what if any notable regional disparity from.
In your markets, that's worth calling out other than New York.
Anything that you've noticed a trend wise that.
Markets are bouncing back stronger faster than others.
I think you know for for Us and if it goes consistent with what we were seeing in quarters before you know for us the southwest South central and southeast.
Continue to remain strong our stronger.
From the cabinet side.
The shutdowns were primarily north west.
Washington, we did not being their comment customers.
As essential and neither did Pennsylvania, so those where we saw some short term hits and those region for the cabinet side.
Great. Thanks, guys congrats on the solid quarter and good luck navigating through that.
Thanks, Thanks room.
One follow up question from the line of Daniel Moore with CJS Securities. Your line is now open.
Thank you again, just just on cash capital allocation.
I guess number one.
Any thoughts M&A as sort of been down the back burner for for quite awhile any thoughts that the disruptions might shake loose a few tuck ins and opportunities or was it just to sort of short lived number one and number two.
Obviously, you took very prudent action of.
Sitting on cash preservation as this is going on what would you need to see to be more comfortable more confident and maybe.
Allocating capital or returning cash to shareholders more aggressively once again thanks.
In terms of the M&A.
My comment is listen well will listen and we'll continue to look at opportunities as they come to US we think there will be a pause.
In that in that area.
As everyone's going to be trying to understand what true valuations are all about where that should be so.
I think both the sewing and the buying are going to be very cautious and as well we.
So not that we wouldn't look anything we just think of the there will be a natural pause home and we're going to put ourselves in a position by these tactics that we're doing now and building in protecting our balance sheet to be ready when that does break.
In terms of.
Of providing cash back to the shareholders.
I think we're really going to need to see another at least another quarter. I mean, that's constantly talk that the board level in there and they're very cognizant of of doing things.
To provide value to our shareholders, but we want at least another quarter to see what we in some look into 2021 I think before we really make that decision permanently.
Makes sense. Thank you again appreciate the color.
That concludes today's question and answer session I'd like to turn the call back to George Wilson for closing remarks.
Thank you all for joining and we look forward to providing an update on our next earnings call in September. Thank you.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
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