Q3 2020 Quanex Building Products Corp Earnings Call
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After the speaker presentation, there will be a question and answer session to ask a question. During this session you would 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 zero.
I'd now like to hand, the conference over to your speaker today to Mr., Scott Silky senior Vice President CFO and Treasurer. Thank you. Please go ahead Sir.
Thanks for joining the call. This morning on the call with me today is George Wilson, our President and CEO.
This conference call will contain forward looking statements in some discussion of 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 in 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.
Ill now discuss the financial results.
We reported revenue of 212.1 million during the third quarter of 2020 compared to $238.5 million. During the third quarter 2019. The decrease was primarily attributable to lower volume related to the cobot 19 pandemic.
More specifically, our two manufacturing facilities in the UK were shut down in compliance with government orders on March 20, Fiveth 2020, and manufacturing operation at those.
Manufacturing plants did not restart until mid to late May.
However, volume across all segments increased significantly in June and net sales in July exceeded prior year on a consolidated basis.
We reported net income of 10.8 million or 33 cents per diluted share for the three months ended July 30, Onest 2020, compared to $11.8 million.36 per diluted share during the three months ended July 31 29 team.
On an adjusted basis net income was $11.1 million or 34 cents per diluted share during the third quarter 2020, compared to $13.7 million or 41 cents per diluted share during the third quarter of 2019.
The adjustments being made to EPS are for restructuring charges impairment charges certain executive severance charges celebrated DNA foreign currency transaction impacts and transaction and advisory fees.
On an adjusted basis EBITDA for the quarter was 27.7 million compared to 32.8 million during the same period of last year.
Moving on to cash flow in the balance sheet cash provided by operating activities was $45.1 million for the three months ended July 30, Onest 2020, which represents an increase of 50.8% compared to the three months ended July 30, Onest 2019.
Cash provided by operating activities was $47.6 million for the nine month ended July 30, Onest 2020.
Represents an increase of 58.7% compared to the nine month ended July 30, Onest 2019.
Free cash flow improved significantly during the third quarter to $40.7 million, which represents an increase of 57.1% compared to the third quarter of 2019.
Year to date 2020 free cash flow more than doubled to 26.9 million compared to the same period of 2019.
Our focus on managing working capital continues to provide benefit, but we realized most of the heavy lifting on this front has been accomplished.
Our balance sheet is healthy our liquidity position is strong and getting stronger and our leverage ratio of net debt to last 12 months adjusted EBITDA improved a 1.1 time that doesn't July 30, Onest 2020, which is lower than where we exited fiscal 2019.
We will continue to focus on generating cash and paying down debt in the fourth quarter, which should allow us to exit fiscal 2020 with a leverage ratio of net debt to last 12 month adjusted EBITDA at or below one times.
We will continue to be up or news opportunistic with respect to repurchasing our stock.
As previously disclosed due to the uncertainty related to the ongoing pandemic, we withdrew full year guidance and reduced our capex budget for fiscal 2020.
Having said that the recovery has been more robust and expected on all fronts and we're now comfortable providing the following full year 2020 guidance.
Net sales of 832 to 837 million.
Adjusted EBITDA of 97 to 102 million.
Capex of approximately 25 million.
And free cash flow of approximately 50 million.
It is important to note that although free cash flow increased significantly in the third quarter end year today 2020, compared to 2019 much of that improvement came from systemic improvements to our management of working capital.
Looking ahead, it will be more challenging to continue this rate of improvement and working capital.
In addition, we expect at a higher pension contribution and an increase in cash tax payments will make fourth quarter comps more challenging.
Ill now turn the call over to George for his prepared remarks.
Thanks Scott.
Overall, we're very pleased with the results we delivered in a quarter that again presented many unprecedented challenges.
As we began our third quarter there were still many unknowns related to covert 19, and its impact on our company and the worldwide economy.
As Scott mentioned our facilities in the UK were closed by government mandate through mid to late May.
In North America, we still have many employees on furloughed status for the first few weeks of the quarter.
Fortunately those headwinds change directions, very quickly and demand rebounded swiftly as we entered June.
All facilities are now operating at pre pandemic run rates and consolidated revenue in July actually exceeded prior year.
As discussed on prior earnings calls our cost structure is highly variable and allowed us to anticipate this change and effectively meet the rapid run up in demand.
I'd like to take a moment to thank my Quantix teammates for their continued hard work and dedication to meeting our customers' needs.
During this changing an uncertain time.
I will now spend a moment discussing results from each of our segments beginning with the North American fenestration.
Revenue in this segment was 122.4 million down 10.2% from prior year third quarter.
This shortfall was primarily driven by the Pandemics negative impact on demand, especially during the month of May.
And Josh adjusted EBITDA of 17.8 million was 4.8 million less than prior year third quarter.
Volume related impacts and higher overtime costs in June and July combined with pandemic related delays to the upgrade project in our vinyl extrusion business in North America, all negatively impacted results.
We ended generated revenue of 38.3 million in our European Fenestration segment, which was 13.7% less than prior year were down 12.9% after excluding the foreign exchange impacts.
As mentioned earlier, our UK plants were shut down through mid to late May and effectively had very little revenue during that month.
However volumes rebounded quickly and revenue in June and July was actually stronger than prior year levels.
In Continental Europe spacer volumes remained steady with strong demand continuing in Germany, Austria, Switzerland and Scandinavia.
Despite low volume in May this segment was able to realize adjusted EBITDA of 7.7 million in the quarter, which represents margin improvement of approximately 290 basis points over prior year.
This margin expansion was driven by favorable material costs.
The efficient ramp up and productivity gains.
Our North American Cabinet components segment reported revenue of 51.9 million, which was 11.5% less than prior year.
However, revenue was only down 7.5% if you adjust for the customer that exited the cabinet manufacturing business in late 2019.
We saw a significant increase in demand in June and July driven by opportunities created by supply chain disruptions in the cabinet component import markets.
Adjusted EBITDA for the segment was $3.1 million.
Down $1.7 million from prior year third quarter.
It is important to note, though that EBITDA was negatively impacted by 1.7 million dollar accrual for writing off the final amount of customer specific inventory associated with customer that exited the cabinet business.
Absent this write off we would have realized margin expansion of approximately 90 basis points in this segment as well.
Finally, unallocated corporate nest DNA cost were 1.4 million better than prior year third quarter. The primary drivers of this improvement were lower executive compensation costs, and a favorable medical costs true up for the quarter.
As Scott also mentioned in his commentary we have focused on generating cash flow.
And those efforts have allowed us to continue deleveraging our already strong balance sheet.
While the potential to benefit from a further improvement in working capital will be limited on a go forward basis. The increased demand. We're seeing provides us with confidence in our ability to maintain a healthy balance sheet generate cash and opportunistically repurchase stock.
Market fundamentals and demand for our products.
Combined with our ongoing focus on operational efficiency gains.
Give us further confidence in our ability to meet the full year 2020 guidance.
All that said, there's still much uncertainty for the mid to long term.
Covert 19 continues to be a problem around the world and the timing and successful distribution of a potential vaccine is questionable.
In addition, the US presidential election is right around the corner and the result could have long lasting economic and societal impacts.
Regardless of who the winners.
With these things in mind, we feel our current strategy of focusing on operational excellence, maintaining a healthy balance sheet generating cash and Opportunistically repurchasing shares remains our best near term strategy.
We have demonstrated our ability to execute on this strategy and we feel that our efforts have positioned us well to capitalize on opportunities when and if they arise.
And with that operator, we're now ready to take questions.
Thank you Sir as a reminder to ask a question you would need to press star one on your telephone.
So which are your question. Please press the pound key please standby, while we compile the county roster.
I show our first question comes from the line as Daniel Moore from CJS Securities. Please go ahead.
George Scott Good morning.
Congrats on the nice results and thanks for taking questions.
He fenestration.
Recovering much quicker than certainly we had expected or maybe tiered how much of that increase do you think in July and August was catch up from being shut down earlier in the year and water order patterns look like as we answer September.
So great question and I wish we had complete visibility into that answer Dan.
We think we think it's a balance of both there is a piece of that we do believe us catch up on however, with that being said September August and September orders look relatively strong arm. So so were confidence the big question Mark with the EU is how does that play into into the next year. So we're pretty cool.
Confident we'll see a strong remainder of.
Our fiscal year.
But how that plays into 20 to 2021 is still a little unknown.
Understood that's helpful.
In North American cabinets.
Are you seeing any pressure from rising input commodity costs.
Can you give us kind of an updated view of where EBITDA margins in that segment can get to over the next I'll save maybe two to three years.
Yes, sure. So there's been a lot of discussion on.
The talk around.
Wood pricing.
We primarily deal in the hardwood markets and for US we have not seen a significant amount of inflationary pressure.
What you're hearing in the news as a lot on the softwood and the softer species, which we don't have a lot of exposure to so we're not seeing a significant amount of pressure on our input costs at this point.
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You know look at looking ahead on your question as it relates to the EBITDA expectations, we're very confident.
Through through what we're doing on on the sale side as well as our operational projects that we've had in place now for two to three years that we're starting to see.
The results of that we can get to low double digit.
EBITDA margins over the next couple of years, when we're very confident on our ability to do that.
Perfect I'll sneak one more just in terms of working capital you guys drops in working really hard on that front going forward.
Is it.
Just isn't going to be more of a headwind going forward or just less than the tailwind essentially or the gains.
Can be hard to continue to generate more but on the gains that you achieve sustainable.
Yes, Dan as Scott I'll take this one.
I think going forward. The focus will continue to be on working capital management I think our message here is that any gains or benefit front on that front going forward are going to be challenging to get get too I think.
I don't we don't think it's going to be a headwind by any means but it's going to be hard to improve going forward.
I think.
Add to that Dan what we mentioned in her script and what we've done over the last couple of years than we're seeing they've been systematic changes. So these.
We're we've effectively change the way, we've done business and very much.
Put the whole working capital project as any other manufacturing, it's a process than we've optimized that we've done a very good job of out so.
That's what you're seeing right now.
Okay and as a.
As a handed over it sounds like.
Buybacks are now potentially back on the table Opportunistically if I heard you is that correct.
Yes, Opportunistically you are correct.
Okay perfect. Thank you.
Thank you next question comes from Rueben Garner from benchmark. Please go ahead.
Thank you good morning, everybody and congrats on the quarter.
Turning women.
Maybe.
I had some production issues at the beginning so if you if you already answered this up pilots I don't think R&D say the build your sales were up.
The up year over year in July I guess first did I did I hear that correctly and then can you can you tell us how how August.
Ill Aug trended I guess, maybe across the three businesses.
So.
You did hear that correctly on a consolidated basis July was up year over year keep in mind Europe exceeded.
Expectations across all fronts, so that really help July.
We're still closing August books, but August was another strong month, and I gave us confidence in putting out the guidance that we included in the release.
Okay and then on the.
Your implied margins I think for the fourth quarter are kind of.
Even year over year, roughly I think that at the EBITDA level can you just talk about how how that looks between gross margin and SGN and no.
You made some touched on the M&A front earlier in the year should we expect that that that's coming back and you maybe get some you're starting to get some improvement in the in the gross margin that's offsetting that.
Yes, I think the way you're looking at that is correct on.
In terms of our operational improvements at that gross margin level. There are some projects that were working on home we've talked about our.
North American vinyl.
Process improvement and the technology upgrade we're starting to see benefits from that project, which we would have expected.
And so your view on on on that is accurate.
Okay, and then last one for me is I heard you mentioned.
Increased over time.
In the quarter I think in June and July I imagine that that running full out.
Is more difficult today than it was last year just given.
Environment. We live in is there is there anything any opportunity for you guys to.
The demand environment obviously.
Increasingly are improving is there any opportunity just given some of the costs that you might have.
To undertake to keep up with demand is there an opportunity to push price in any of your.
Businesses, maybe maybe even more so than you would have than in other times, just because you're facing elevated labor costs and other things associated with what's coated.
Very good question Rubin first in terms of the overtime I'll comment on that first and then on the pricing second.
There was the ramp up was fast we saw upcoming however, the reason for the overtime utilization.
Was.
First because of the rate at which it came back and then second because of the difficulties.
That are in the marketplace and I'm sure. We're not the only person were effectively hiring in almost every plant that we have and the carriers are and it's hard to get someone to leave unemployment rate now the cone.
To work and fill open positions so recruiting across the board. It for every position has become.
At least a short term challenges and.
We know that Thats the case for most companies. So thats why we hope to utilize the overtime as much as we did however, again our structure allowed for that and I think we did a fantastic job of.
Fulfilling demand and making sure we were able to to capitalize on the orders as they come in terms of pricing.
It's a little that becomes more complicated Ruben I mean, we'll obviously go after price, where we think it's different by each product line in different challenges and in each of the region. So.
I can tell you where we are able to go after price, we will do that and have done.
Great Congrats again and good luck navigating through their senior.
Thank you.
Thank you next question comes from Julio Romero from Sidoti <unk> Company. Please go ahead.
Hey, Good morning Hope you all are well.
Thanks.
Wanted to start with North American fenestration.
If you could talk about particular product lines had the strongest demand out of coming out of July I think you've talked in the past about.
Screens, leading a growth there and less so from from micron and and space or can you maybe just talk about what you're seeing today in regards to which product lines driving demand.
In the quarter.
There was strong demand across all the product lines on.
But that trend of if I were to rank on.
The opportunities and.
The ability to grow revenue faster than market continues to be present more so in the screens area than the other product lines, but we saw consistent strong.
Demand across all three product lines.
Okay.
And on on the cabinet side, Mr Cabinet sales adjusting for that one customer we exited outperformed the KC MK data for the last three months and I think I saw for the July data for Casey and eight semi custom actually outperformed stock which was surprising.
Can you maybe just talk to what you're seeing there in regards to semi custom evaluate what you're hearing from customers.
No.
You're exactly right we were too.
We had solve the spike in demand and what we're going is capitalizing on some spot business along with.
Some new sales opportunities that have arisen for us.
So the fact that our demand we have been very busy in all of our comment plants.
So I guess, we were pleasantly surprised when we saw the KC on data and based on the order pattern that we see a seed that data is real it is the first fundamental long time that we've seen semi custom outperform stock.
And I think as you continue to have impact from the anti dumping in the tariffs.
And combined with a stabilization of the hardwood pricing.
That market is kind of catching up with itself and it will it will balance out. So we're seeing the same thing and we're seeing it in terms of our order patterns as well.
Got it and then just last one for me is.
You touched on earlier your balance sheet is in a much better position has been in the past and you pay down debt in the quarter.
Yes, as we approach 2021.
Can you maybe talk about what capital projects or maybe top line for you.
In terms of.
Capex operational projects I could see us there, there's a mixing prob project that we would like to so.
Initiate over in our UK vinyl business as well as probably a wave two of our second vinyl extrusion.
The results that were beginning to see in the initial project are very encouraging and oil that could potentially lead to phase two and continued to developing their own as well as the remaining Capex will go to support growth. We mentioned that we are opened up a new screen plant in the northeast and and we're evaluating other areas.
This country that we could though.
Expand out as well so I think that that would be the priority that we'll be looking at going into 2021 for operational projects I think for modeling purposes for next year, you should assume a capital budget that's higher than this year. So this year, we just guided to about 25 million.
Something higher than that I don't think that.
You are going to see as go much much more than 30 to 35 million, but we're going through our budgeting process now and we'll come out with official 2020 guidance in December.
Got it yeah that makes sense.
I think for me thanks, very much guys.
Thank you.
Thank you. Our next question comes from the line of.
Stephen Ramsey from Thompson Research. Please go ahead.
Hey, good morning is actually Brian barrels on for Stephen.
Thanks for taking the questions I guess on the guidance range. You guys are you guys provided.
So as you call out as the biggest drivers to reaching the high or low end of that range.
So.
For the higher end of the range I think what we would consider to see is maybe there's still some pull pull through volume and that that the.
The seasonality home.
Would be favorable to also extended build season wet weather, obviously can have an impact either way. So if we get an early hard fall that may drive us towards the low end of the range.
But outside of that.
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It's specifically just timing of customer orders and goal I think we're pretty comfortable that we'll be right in there.
I think Europe, continuing to perform as it has over the last couple of months will play a role and ultimately where we fall within that guidance.
But as we sit here today, we're comfortable.
And obviously I have to put the disclaimer anything that happens unknowingly as covert and some sort of secondary shutdown.
But that goes for everyone I suppose.
Yes, understood and then on the.
Following up on some of the Capex commentary you guys gave.
On the.
Kind of German Spacers unit I guess, what level of investment are you guys thinking behind that in Q4 and that index.
Anyone.
I think for our European Spacer business I mean, the investment will continue to be very very similar to where we are so we don't breakout our capex to that level of detail between the two the two product lines in Europe.
But we continue to be very happy of what we're seeing in terms of or spacer growth in.
European in international markets. So, we'll continue to invest in that group and some capacity expansion.
Yes, thank very much.
Thanks.
Thank you.
I show next question comes from the line of Ken Zener from Keybanc. Please go ahead.
Good morning, George Scott.
Good morning, Tim How're you.
I'm doing well.
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Very nice quarter in terms of your operational stability in the cash flow. So.
Windows screens doing better as they outsource spacers and extrusion.
As the other side can you talk about what you're seeing or hearing from customers.
Or really the end user preference for having someone come into their house, because I think one of the big issues.
Or trends, we saw in to Q wise smaller ticket items.
Is going to home depot at St making up the gap at a pace.
Windows are very different could involve the contractor and but I'm I'm trying to understand is how much.
Demand might be building up for this product once people get comfortable allowing contractors to come into the house because that could be real tailwind for I think higher priced items that involve contractors next year could you expand on that to the degree you feel comfortable.
Sure and we've spent a lot of time talking to our customers about those I think what we've seen the that's evolved on when you print replace a window theirs.
Although there's contractors in the home there is able to be separation, it's not like you know.
Going and painting the entire inside of your home so.
There there is an ability to suffer yourself a little bit what has changed and I think where our customers have evolved is actually the selling process. So they.
So a lot of our customers have done a phenomenal job of creating online sales pools virtual selling tools that have replaced that that experience, where guy goes in and measures all your windows and Doug Wilson and so there's new tools that have come out to help facilitate that and what we're hearing is that.
Manner for the Windows.
And we had the same concern initially come about.
What that millions and they have not skipped a beat and demand has remained very strong and.
Our customers continued to be optimistic even going into next year. So we've been throw that what what that it's been but really the most significant changes in their selling process.
Interesting.
Staying on that segment or that business line de extrusion could you just expand upon the you talked about delay for the domestic extrusion.
Improvements could you clarify that I've, just a little foggy on that as well as your comments about phase to us that applies to the us as well and just restate. The context that has made that business worthy of incremental investments why the supply.
Competitions improved for you on that extrusion. Thank you very much.
In terms of the delay of the project.
The main reason why is the supplier the equipment is from Australia. So obviously, there's there's travel restrictions and the ability to some a lot of their technical teams over to launch has forced us to be able to do things different. So you know installation via zoom and.
It was it was oil.
It was the process was a little clunky and slow at first split now what has gone as our team has learned an enormous amount and the technology that we're using to be able to launch with our own asset resources has really picked up speed. So.
It delayed it initially but.
What we have recovered and I'm happy with the progress in terms of vinyl market. So theres just.
As we continue to learn what we're good at what we're learning in the process.
We know.
From that experience and what we've done operationally, but we can be competitive we can be.
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We can win in this market. So it's more learning about ourselves internally over the course of the last four years of our processing and then with new technology, and what Thats been able to to generate for us in terms of benefits.
The other thing that we're we're doing in terms of a vinyl extrusion is we're beginning to extrude.
And so some off market so.
Filling up capacity in areas that may not be traditionally just window profiles.
But utilizing our extrusion assets as a contract manufacturers how helped our profitability. So that's why you see a little bit of a change in direction and it's more because of our operational improvements.
Great and then Scott you said 1.7 million in cabinets was that charge and this quarter is that correct.
Correct and there is actually a similar charge into Q, So all of 3.4 million.
And nothing's left there so view adjust cabinet results for that inventory write down you can really see that the cabinet business is doing very well much better than it has for us in a long time.
And it's fair to assume.
Prospectively meeting Twoq and Threeq you next year, we should assume.
The margin base would be adjusted for those charges correct as a reasonable comp.
Easier comps next year, correct for Twoq and Threeq you.
Thank you very much gentlemen, bye. Thank you. Thanks.
Thank you I shouldn't further questions in the queue at this time I'd like to turn the call over to Mr., George Wilson CEO for closing comments.
Great. Thanks, we'd like to thank everyone for joining and we look forward to providing you all an update on our next earnings call, which will will be in December. Thank you.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
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Ladies and gentlemen, thank you for standing by and welcome to the Q3 2020 Quanex building products Corporation earnings Conference call. At this time, all participants are in the listen only mode.
After the speaker presentation, there will be a question and answer session to ask a question. During this session you would 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 zero.
I would now like to hand, the conference over to you a speaker today to Mr., Scott Silky senior Vice President CFO and Treasurer. Thank you. Please go ahead Sir.
Thanks for joining the call. This morning on the call with me today is George Wilson, our President and CEO.
This conference call will contain forward looking statements in some discussion of 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 quanex undertakes no obligation to update or revise any forward looking statement.
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 reported revenue of $212.1 million during the third quarter 2020, compared to 238.5 million during the third quarter 2019. The decrease was primarily attributable to lower volume related to the cobot 19 pandemic.
More specifically, our two manufacturing facilities in the UK were shut down in compliance with government orders on March 25, 2020 and manufacturing operation at those.
Manufacturing plants did not restart until mid to late May.
However, volume across all segments increased significantly in June and net sales in July exceeded prior year on a consolidated basis.
We reported net income of 10.8 million or 33 cents per diluted share for the three months ended July 30, Onest 2020, compared to $11.8 million.36 per diluted share during the three months ended July 31 29 team.
On an adjusted basis net income was $11.1 million or 34 cents per diluted share during the third quarter 2020, compared to $13.7 million or 41 cents per diluted share during the third quarter of 2019.
The adjustments being made to EPS or restructuring charges impairment charges certain executive severance charges celebrated DNA foreign currency transaction impacts and transaction and advisory fees.
On an adjusted basis EBITDA for the quarter was 27.7 million compared to 32.8 million during the same period of last year.
Moving on to cash flow in the balance sheet cash provided by operating activities was 45.1 million for the three months ended July 30, Onest 2020, which represents an increase of 50.8% compared to the three months ended July 31 2019.
Cash provided by operating activities was $47.6 million for the nine months ended July 30, Onest 2020.
Represents an increase of 58.7% compared to the nine month ended July 31 2019.
Free cash flow improved significantly during the third quarter to 40.7 million, which represents an increase of 57.1% compared to the third quarter of 2019.
Year to date 2020 free cash flow more than doubled the 26.9 million compared to the same period of 2019.
Our focus on managing working capital continues to provide benefit, but we realized most of the heavy lifting on this front has been accomplished.
Our balance sheet is healthy our liquidity position is strong and getting stronger and our leverage ratio of net debt to last 12 months adjusted EBITDA improved a 1.1 times as of July 30, Onest 2020, which is lower than where we exited fiscal 2019.
We will continue to focus on generating cash and paying down debt in the fourth quarter, which should allow us to exit fiscal 2020 with a leverage ratio of net debt to last 12 month adjusted EBITDA at or below one times.
We will continue to be up or news opportunistic with respect to repurchasing our stock.
As previously disclosed due to the uncertainty related to the ongoing pandemic, we withdrew full year guidance and reduced our capex budget for fiscal 2020.
Having said that the recovery has been more robust than expected on all fronts and we're now comfortable providing the following full year 2020 guidance.
Net sales of 832 to 837 million.
Adjusted EBITDA of 97 to 102 million.
Capex of approximately 25 million.
And free cash flow of approximately 50 million.
It is important to note that although free cash flow increased significantly in the third quarter and year to date 2020 compared to 2019 much of that improvement came from systemic improvements to our management of working capital.
Looking ahead, it will be more challenging to continue this rate of improvement and working capital.
In addition, we expect at a higher pension contribution and an increase in cash tax payments will make fourth quarter comps more challenging.
Ill now turn the call over to George for his prepared remarks.
Thanks Scott.
Overall, we're very pleased with the results we delivered in a quarter that again presented many unprecedented challenges.
As we began our third quarter there were still many unknowns related to cope with 19 and its impact on our company and the worldwide economy.
As Scott mentioned our facilities in the UK were closed by government mandate through mid to late May in North America, we still have many employees on furloughed status for the first few weeks of the quarter.
Fortunately those headwinds change directions, very quickly and demand rebounded swiftly as we entered drew.
All facilities are now operating at pre pandemic run rates and consolidated revenue in July actually exceeded prior year.
As discussed on prior earnings calls our cost structure is highly variable and allowed us to anticipate this change and effectively meet the rapid run up in demand.
I'd like to take a moment to thank my Quantix teammates for their continued hard work and dedication to meeting our customers' needs.
During this changing an uncertain time.
I will now spend a moment discussing results from each of our segments beginning with the North American fenestration.
Revenue in this segment was 122.4 million.
Alan 10.2% from prior year third quarter.
This shortfall was primarily driven by the Pandemics negative impact on demand, especially during the month of May.
In Josh adjusted EBITDA of 17.8 million was 4.8 million less than prior year third quarter.
Volume related impacts and higher overtime costs in June and July combined with pandemic related delays to the upgrade project in our vinyl extrusion business in North America, all negatively impacted the results.
We generally generated revenue of 38.3 million in our European Fenestration segment, which was 13.7% less than prior year or down 12.9% after excluding the foreign exchange impacts.
As mentioned earlier, our UK plants were shut down through mid to late May and effectively had very little revenue during that month.
However volumes rebounded quickly and revenue in June and July was actually stronger than prior year levels.
In Continental Europe spacer volumes remained steady with strong demand continuing in Germany, Austria, Switzerland and Scandinavia.
Despite low volume in May this segment was able to realize adjusted EBITDA of 7.7 million in the quarter, which represents margin improvement of approximately 290 basis points over prior year.
This margin expansion was driven by favorable material costs.
The efficient ramp up and productivity gains.
Our North American Cabinet components segment reported revenue of 51.9 million, which was 11.5% less than prior year.
However, revenue was only down 7.5% if you adjust for the customer that exited the cabinet manufacturing business in late 2019.
We saw a significant increase in demand in June and July driven by opportunities created by supply chain disruptions in the cabinet component import markets.
Adjusted EBITDA for the segment was 3.1 million.
Down 1.7 million from prior year third quarter.
It is important to note, though that EBITDA was negatively impacted by 1.7 million dollar accrual for writing off the final amount of customer specific inventory associated with that customer that exited the cabinet business.
Absent this write off we would have realized margin expansion of approximately 90 basis points in this segment as well.
Finally, unallocated corporate nest DNA cost were 1.4 million better than prior year third quarter. The primary drivers of this improvement were lower executive compensation costs, and a favorable medical costs true up for the quarter.
As Scott also mentioned in his commentary we have focused on generating cash flow.
And those efforts have allowed us to continue deleveraging our already strong balance sheet.
While the potential to benefit from a further improvement in working capital will be limited on a go forward basis. The increased demand. We're seeing provides us with confidence in our ability to maintain a healthy balance sheet.
Generate cash and Opportunistically repurchase stock.
Market fundamentals and demand for our products.
Combined with our ongoing focus on operational efficiency gains.
Give us further confidence in our ability to meet the full year 2020 guidance.
All that said, there's still much uncertainty for the mid to long term.
Covert 19 continues to be a problem around the world and the timing and successful distribution of a potential vaccine is questionable.
In addition, the US presidential election is right around the corner and the result could have long lasting economic.
Societal impacts.
Regardless of who the winners.
With these things in mind, we feel our current strategy of focusing on operational excellence, maintaining a healthy balance sheet generating cash.
And Opportunistically repurchasing shares remains our best near term strategy.
We have demonstrated our ability to execute on this strategy and we feel that our efforts have positioned us well to capitalize on opportunities when and if they arise.
And with that operator, we're now ready to take questions.
Thank you Sir as a reminder to ask a question you would need to press star one on your telephone.
Which are your question. Please press the pound key please standby, while we compile the county roster.
I show our first question comes from the line as Daniel Moore from CJS Securities. Please go ahead.
George Scott Good morning.
Running on the nice results and thanks for taking questions.
He fenestration.
Recovering much quicker than certainly we had expected or maybe tiered how much of that increase do you think in July and August was catch up from being shutdown earlier in the year and wire order patterns look like as we answer September.
So great question and I wish we had complete visibility into that answered them.
And we think we think it's a balance of both there is a piece of that we do believe is catch up on however, with that being said September August and September orders look relatively strong arm. So so were confidence the big question Mark with the EU is how does that play into into the next year. So we're pretty close.
Confident we'll see a strong remainder of.
Our fiscal year.
Well how that plays into 20 to 2021 is still a little unknown.
Understood that's helpful.
In North American cabinets.
Are you seeing any pressure from rising input commodity costs.
Can you give us kind of an updated view of where EBITDA margins net segment can get to over the next ill say, maybe two to three years.
Yes, sure so theres been a lot of discussion on.
The talk around.
Wood pricing.
We primarily deal in the hardwood markets and for US we have not seen a significant amount of inflationary pressure what you're hearing in the news was a lot on the softwood and the softer species, which we don't have a lot of exposure to so we're not seeing a significant amount of pressure on our input costs at this point.
You know looking looking ahead on your question as it relates to the EBITDA expectations, we're very confident.
Through through what we're going on on the sale side as well as our operational projects that we've had in place now for two to three years that we're starting to see all the results of that we can get to low double digit.
EBITDA margins over the next couple of years, when we're very confident on our ability to do that.
Perfect I'll sneak one more just in terms of working capital you guys drops in working really hard on that front going forward.
Okay is it.
Just is it going to be more of a headwind going forward or just less than the tailwind essentially or the gains.
Can be hard to continue to generate more buttons on the gains that you achieve sustainable.
Yes, Dan as Scott I'll take this one.
I think going forward. The focus will continue to be on working capital management I think our message here is that any gains or benefit from on that front going forward are going to be challenging to get get too I think.
I don't we don't think it's going to be a headwind by any means but it's going to be hard to improve going forward.
I think.
Add to that Dan what we mentioned in her script and what we've done over the last couple of years than we're seeing they've been systematic changes. So these.
We're we've effectively change the way, we've done business and very much.
Put the whole working capital project as any other manufacturing, it's a process and we've optimized that we've done a very good job. So.
That's what you're seeing right now.
Okay and as a.
As I handed over it sounds like.
Buybacks are now potentially back on the table Opportunistically if I heard you is that correct.
Yes, Opportunistically you are correct.
Okay perfect. Thank you.
Thank you next question comes from Rueben Garner from benchmark. Please go ahead.
Thank you good morning, everybody and congrats on the quarter.
Turning women.
Maybe.
I had some connection issues at the beginning so if you if you already answered this up pilots I don't think RG say they'll build your sales were up.
Bumped up year over year in July I guess first as I did I hear that correctly and then can you can you tell us how how August.
Ill Aug trended I guess, maybe across the three businesses.
So.
You did hear that correctly on a consolidated basis July was up year over year keep in mind Europe exceeded expectations across all fronts. So that really help July.
We're still closing August books, but August was another strong month, and I gave us confidence in putting out the guidance that we included in the release.
Okay and then on the.
Your implied margins I think for the fourth quarter are kind of.
Even year over year, roughly I think that at the EBITDA level can you just talk about how how that looks between gross margin and SGN and no.
You made some touched on the M&A front earlier in the year should we expect that that that's coming back and you maybe get some you're starting to get some improvement in the in the gross margin that's offsetting.
Yes, I think the way you're looking at that is correct on.
In terms of our operational improvements at that gross margin level. There are some projects that were working on on we've talked about are.
North American vinyl.
Process improvement and the technology upgrade we're starting to see benefits from that project, which we would have expected.
And so your view on on on that is accurate.
Okay, and then last one from me is I heard you mentioned.
Increased over time.
In the quarter I think in June in July.
And that that running full out is is more difficult today than it was last year just given.
The environment. We live in is there is there anything any opportunity for you guys to the demand environment, obviously is.
Increasingly.
There are improving is there any opportunity just given some of the costs that you might have.
Undertake.
To keep up with demand is there an opportunity to push price in any of your.
Businesses, maybe maybe even more so than you would have than in other times, just because you're facing elevated labor costs and other things associated with with with co that.
Very good question Rubin first in terms of the overtime our comment on that first and then on the pricing sorry.
There was the ramp up was fast we saw combing own. However, the reason for for the overtime utilization was.
First because of the rate at which came back and then second because with the difficulties.
That are in the marketplace and I'm sure. We're not the only person were effectively hiring in almost every plant that we have and the carriers are and it's hard to get someone for leave unemployment right now the cone.
To work and fill open positions so recruiting across the board. It for every position has become.
At least a short term challenges and.
We know that Thats the case for most companies. So thats why we have to utilize the overtime as much as we did however, again our structure allowed for that and I think we did a fantastic job of.
Fulfilling demand and making sure we were able to capitalize on the orders as they come in terms of pricing.
It's a little that becomes more complicated Ruben I mean, we'll obviously go after price, where we think it's different by each product line in different challenges.
In each of the region so.
I can tell you where we are able to go after price, we will do that and have done.
Great Congrats again and good luck navigating through their senior.
Thank you.
Thank you next question comes from Julio Romero from Sidoti <unk> Company. Please go ahead.
Hey, good morning hope you'll awhile.
Thanks.
I wanted to start with North American administration.
If you could talk about particular product line to have the strongest demand out of coming out of July I think you've talked in the past about.
Screens, leading a growth there and less so from from micron and and space or can you maybe just talk about what you're seeing today in regards to which product lines driving demand.
In the quarter.
There was strong demand across all the product lines.
But that trend of if I were to rank them.
The opportunities and.
The ability to to grow revenue faster the market continues to be present more so in the screens area than the other product lines, but we saw consistent strong.
Demand across all three product lines.
Okay.
And on on the cabinet side, I guess, the cabinet sales adjusting for that one customer we exited outperformed the case DNA data for the last three months and I think I saw for the July data for Casey in a semi custom actually outperformed stock which was surprising.
Can you maybe just talk to what you're seeing there in regards to semi custom evaluate what you're hearing from customers.
No.
You're exactly right we were too.
We had solve the spike in demand and what we're going is capitalizing on some spot business along with.
Some new sales opportunities that have arisen for us.
So the fact that our demand we have been very busy and all of our cabinet plants.
So I guess, we were pleasantly surprised when we saw the KC on data and based on the order pattern that we see see that data is real it is the first fundamental long time that we've seen semi custom outperform stock.
And I think as you continue to have impact from the anti dumping and the tariffs.
And combined with a stabilization of the hardwood pricing in that market is kind of catching up with itself and it will it we have will balance out. So we're seeing the same thing and we're seeing it in terms of our order patterns as well.
Okay.
Got it and then just last one for me is.
You touched on earlier your balance sheet is in a much better position that it has been in the past and you take out some debt in the quarter.
Yes, as we approach 2021 can you maybe talk about what capital projects or maybe top line for you.
In terms of Capex operational projects I could see us there's a mixing prob project that we would like to.
Initiate over in our UK vinyl business as well as probably a wave two of our second home vinyl extrusion results that were beginning to see in the initial project are very encouraging and all that could potentially lead to phase two and continued to develop them in their home.
As well as the remaining Capex will go to support growth. We mentioned that we are opened up a new screen plant in the northeast them and we're evaluating other areas. This country that we could will expand out as well. So I think that that would be the priority that we'll be looking at going into 2021 for operational projects I think for my.
Modeling purposes for next year, you should assume a capital budget that's higher than this year. So this year, we just guided to about 25 million.
Something higher than that I don't think that.
Youre going to see US go much much more than 30 to 35 million, but we're going through our budgeting process now and we'll come out with official 2020 guidance in December.
Got it yeah that makes sense.
That's it for me thanks, very much guys.
Thank you.
Thank you. Our next question comes from the line of.
Stephen Ramsey from Thompson Research. Please go ahead.
Hey, good morning is actually brand barrels on for Steve and I think you're taking the questions I guess on the guidance range. You guys are you guys provided.
As you call out as the biggest driver is reaching the high or low end of that range.
So.
For the higher end of the range I think.
What we would can consider to see is maybe there's still some pull pull through volume in that that the the seasonality home.
Would be favorable to also extended build season wet weather, obviously can have an impact either way. So if we get an early hard fall that may drive us towards the low end of the range.
But outside of that.
It's specifically just timing of customer orders and goal I think we're pretty comfortable that we'll be right in there.
I think Europe, continuing to perform as it has over the last couple of months will play a role and ultimately where we fall within that guidance.
As we sit here today, we're comfortable.
And obviously I have to put out the disclaimer anything that happens unknowingly as covidien, some sort of secondary shutdown.
But that goes for everyone I suppose.
Yes, understood and then on the basis following up on some of the Capex commentary you guys gave.
On the.
Kind of German Spacers unit I guess, what level of investment are you guys thinking behind that in Q4 and that index.
Anyone.
I think for fair, our European Spacer business I mean, the investment we will continue to be very very similar to where we have so we don't breakout our capex to that level of detail between the two the two product lines in Europe.
But we continue to be very happy of what we're seeing in terms of or space or growth in.
European in international markets. So, we'll continue to invest in that growth in some capacity expansion.
Yes, thanks very much.
Thanks.
Thank you.
I show next question comes from the line of Ken Zener from Keybanc. Please go ahead.
Good morning, George Scott.
Good morning, then how are you.
And doing well.
[music].
Very nice quarter in terms of your operational stability in the cash flow. So.
Windows screens doing better as they outsource spacers and extrusion.
The other side can you talk about what you're seeing or hearing from customers.
Or really the end user preference for having someone come into their house, because I think one of the big issues.
Or trends, we saw in to Q wise smaller ticket items.
Going to home depot, I'd say, making it the gas at a pace.
Windows are very different can involve the contractor and but I'm I'm trying to understand it's how much.
Demand might be building up finished product once people get comfortable allowing contractors to come into the house because that could be real.
Well when for I think higher priced items that involve contractors next year could you expand on that to the degree you feel comfortable.
Sure and we've spent a lot of time talking to our customers about those I think what we've seen the that's evolved on when you create replace a window theirs.
Although there is contractors in the home there is able to be separation, it's not like you know.
Really going and painting the Empire inside of your home so.
There there is an ability to suffer yourself a little bit what has changed and I think where our customers have evolved is actually the selling process. So they.
So a lot of our customers have done a phenomenal job of creating online sales pools virtual selling tools that have replaced that that experience, where our guy goes in and measures all your windows and Doug Wilson and so the theres new tools that have come out to help facilitate that and what we're hearing is that the.
Man for the Windows.
And we had the same concerned initially come about.
What that millions and they have not skipped a beat and demand has remained very strong and.
Our customers continue to be optimistic even going into next year. So we've been throw that what what that it's been but really the most significant changes in their selling process.
Interesting.
Staying on that segment or that business line de extrusion could you just expand upon the you talked about delay for the domestic extrusion.
Improvements could you clarify that I've, just a little foggy on that as well as your comments about phase two if that applies to the us as well just restate. The contacts that has made that business worthy of incremental investments why the supply or competitions improved for you on that extruded. Thank you very much.
Now in terms of the delay of a project.
The main reason why is the supplier the equipment is from Oscar of so obviously, there's there's travel restrictions and the ability to some a lot of their technical teams over to launch has forced us to be able to do things different so installation via zoom and home.
It was it was oil.
It was the process was a little clunky and slow at first split now what has gone as our team has learned an enormous amount and the technology that we are using to be able to launch with our own asset resources has really picked up speed. So.
It delayed it initially but on.
We have recovered and I'm happy with the progress in terms of vinyl market itself. There's just so as we continue to learn what we're good at what we're learning in the process we know.
From that experience and what we've done operationally that we can be competitive we can be.
[music].
We can win in this market. So it's more learning about ourselves internally over the course of the last four years of our process and then with new technology, and what Thats been able to to generate for us in terms of benefits.
The other thing that we're we're doing in terms of a vinyl extrusion is we're beginning to extrude.
And so some off market so.
Filling up capacity in areas that may not be traditionally just window profiles.
But utilizing our extrusion assets as a contract manufacturers help helped our profitability. So that's why you see a little bit of a change in direction than its more because of our operational improvements.
Great and then Scott you said 1.7 million in cabinets was a charge this quarter is that correct.
Correct and there is actually a similar charge into Q, so almost 3.4 million.
And nothing's left there so view adjust cabinet results for that.
Inventory write down you can really see that the cabinet business is doing very well much better than it has for us in a long time.
And it's fair to assume.
Prospectively needing to Q and Threeq you next year, we should assume.
The margin base would be adjusted for those charges correct as a reasonable comp.
Easier comps next year, correct for Twoq and Threeq.
Thank you very much gentlemen, bye. Thank you. Thanks.
Thank you I shouldn't further questions in the queue at this time I would like to turn the call over to Mr., George will sit CEO for closing comments.
Great. Thanks, we'd like to thank everyone for joining and we look forward to providing you all an update on our next earnings call, which will will be in December. Thank you.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.